Y and Y Ditmas LLC’s building at 9502 Ditmas Avenue in Brooklyn is housing A-One Moving & Storage, Inc. (Courtesy of PropertyShark.com)
New York state law provides for the judicial dissolution of a limited liability corporation where the original purpose behind its formation is no longer achievable, a Commercial Division judge has ruled.
Brooklyn Supreme Court Justice Carolyn Demarest (See Profile) said she found sufficient basis for her conclusion in Limited Liability Company Law (LLCL) §702 and she rejected the invitation of the petitioner in Matter of Natanel v. Cohen, 502760/13, to draw on rulings by the Delaware Chancery Court to justify the disbanding of the Y and Y Ditmas LLC.
One of the 50-50 partners in the LLC, Yariv Natanel, petitioned to dissolve the entity he formed with Yosef Cohen in October 2004 so the LLC could buy the building at 9502 Ditmas Ave. in Brooklyn that housed A-One Moving & Storage, Inc., a business operated by the two men. There was no operating agreement for Y and Y.
The relationship between the two men soured, and by the late 2000s, their wives stepped in to manage the building because the two partners could no longer communicate with each other. Police were called during one particularly heated dispute and the locks on the building were changed at another point, according to Demarest’s ruling.
LLCL §702 provides for judicial dissolution of an LLC “whenever it is not reasonably practicable to carry on the business in confirmity with the articles of organization or operating agreement.”
But Demarest noted that “not reasonably practicable” was not interpreted by the courts until a 2010 ruling by the Appellate Division, Second Department in Matter of 1545 Ocean Avenue, LLC v. Ocean Suffolk Properties, LLC, 72 AD3d 121.
The court in 1545 Ocean Avenue, established guidelines, the judge said, namely that “mere disagreements between partners regarding accounting” are insufficient to warrant an LLC’s judicial dissolution and that the standards for the dissolution of LLCs in New York are less flexible than those governing the court-ordered disbanding of corporations and partnerships.
For purposes of deciding Natanel, Demarest found that 1545 Ocean Avenue established that an LLC may be dissolved under LLCL §702 if it is “unable to function as intended or that it is failing financially.”
“The controlling statute provides for dissolution of the LLC, in the discretion of the court, where the purpose of the LLC can no longer be achieved,” Demarest wrote.
The judge said the LLC was formed so Natanel and Cohen could buy the building that housed A-One Moving & Storage but because of the deteriorated relationship between the two men, A-One closed by mid-2012.
Natanel and Cohen had each formed new moving companies which are in competition with one another, with Natanel moving his venture to another location, according to Demarest’s ruling.
“There is no dispute that A-One no longer functions as a business and, indeed, both partners have formed separate businesses,” Demarest wrote. “In such circumstances, Y and Y’s purpose no longer exists and dissolution is appropriate.”
Demarest declined to adopt the argument by Natanel that she should be guided by several rulings from Delaware Chancery Court, including Red Sail Easter Ltd. Partners v. Radio City Music Hall Products, 1992 WL 251380, which have held that deadlock between two equal LLC partners is a basis for courts to grant a motion for dissolution.
The partnerships in those Delaware cases, the judge said, had operating agreements or other controlling documentation and it “does not appear that Delaware law applies in New York.”
Demarest granted Natanel’s petition for dissolution and directed both sides to submit the names of prospective trustees to oversee the liquidation of the remaining property. Natanel said he wants to sell the building and Cohen said he wants to retain it as an investment.
The judge said the two women kept the business functioning despite not getting along very well either. In fact, the judge credited the “ingenuity” of the parties with “circumventing their mutual hostility” and keeping Y and Y afloat despite the acrimony.
Peter Mahler of Farrell Fritz in Manhattan represented Natanel.
Steven Lester of La Reddola, Lester & Associates in Garden City argued for Cohen.