Though this blog focuses on Delaware decisions addressing business law topics, there are not nearly as many decisions on some parts of the relatively recent LLC statutes–compared with the bountiful case law on the DGCL. Thus, when a court of another state interprets those Delaware statutes it is worth a reference. See, e.g., Horning case I summarized here . [Aside: yes, I am trying to catch up on the regular tide of Delaware decisions, but my schedule lately has been very, very busy. This post happens to be on a topic I am working on for a pending case.]
In Trump v. Cheng, (NY Supr. Ct., NY Cty), 2006 LEXIS 2465, read opinion here, the NY trial court interpreted Section 17-802 of the Delaware Limited Partnership Act relating to a basis for the Court to order forced dissolution. The Delaware LLC Act has an analogous provision at Section 18-802. The reasoning applied to the LP statute applies at least by analogy to the very similar LLC statute. Many issues were addressed in the Trump case, but at the end of the opinion, the NY court addressed whether there was a basis to order dissolution pursuant to the statutory language that allows for judicial dissolution if
"…it is not reasonably practicable to carry on the business in conformity with the partnership agreement…"
[If one substitutes LLC agreement for partnership agreement, the LLC statute is nearly identical].
So, what does that statute mean in real life for a party seeking or opposing forced dissolution for a profitable, ongoing business due to dissension or even deadlock among members?
Any reader who has an informed view on the issue is welcome to comment on this post or send me an email at firstname.lastname@example.org, especially in light of the Delaware cases discussed below ( after a short summary of the relevant part of the Trump case.)
My reading of the cases is that no Delaware decision interpreting the LP or the LLC dissolution provision has forced the dissolution of a profitable, viable ongoing LLC merely due to dissension–or even alleged deadlock. This Trump decision is consistent with my view of the other cases discussed below. (Another New York decision, the Horning case, supra, did not think dissension alone was enough either.)
The NY court in the Trump case reasoned that "Trump failed to point to specific facts on which the Court may determine that the business is no longer reasonably practicable to continue." (citing to several Delaware cases interpreting that section, such as Cincinnati Bell, 1996 WL 506906 *9(Del.Ch.); and PC Tower, 1989 WL 63901 *6 (Del. Ch. 1989)(dissolution ordered where business not viable and debt far exceeded assets)). Trump admitted to receiving a large return on his investment and there was nothing in the governing agreement that required that the real estate investment entity at issue, distribute its profits or dissolve upon the sale of major assets, as Trump wanted done.
The Trump court also cited to the Delaware Chancery Court’s decision in Haley v. Talcott, 864 A.2d. 86, 89 (Del. Ch. 2004), read opinion here, which was summarized on this blog here. I suggest that Haley was not decided on the basis of Section 18-802 but rather that court relied for its decision on Section 273 of the DGCL , by analogous reasoning. That statute is expressly limited to a situation where there are 2 shareholders only, each owning 50/50 interests in the entity. The Haley case also involved a real estate holding company. The parties’ agreement did not provide for an equitable "exit mechanism" in the Chancery Court’s view.
What if there is "no agreed upon exit mechanism" and ownership other than a 50/50 split by 2 members? Then how does the statute apply?
The only other Delaware decision to address Section 18-802 regarding forced dissolution of an LLC is the Chancery Court’s decision in the Silver Leaf case, summarized here on this blog, but I argue that the Silver Leaf case is not helpful to one analyzing whether the statute can be used to force the dissolution of a profitable LLC that is continuing to function and profit despite dissension in the closely-held membership. The Silver Leaf case involved an entity that was not viable, not profitable, and in the view of the court, its entire business model was a sham. Thus, this case is not helpful in applying Section 18-802 to a profitable, viable, ongoing business, where one of the parties simply is not happy and "wants out".
The Horning case, supra, provides a thorough explanation of why the LLC statute might make it harder for one person to force a dissolution, absent an agreement providing for it. The suggestion in that case is that, unlike the corporate statute, the LLC statute was based on an original goal to make it harder to used Limited Partnerships as a sham to avoid estate taxes and the LLC statute was modeled in part on the LP statute.
Notably, the LLC statute does not have some of the provisions in the DGCL that allow for judicial dissolution upon a deadlock, such as Section 273, as referenced in the Haley case, supra. So too, some cases refer to the inherent equitable power of the court to dissolve a corporation in extreme cases of fraud, for example– but is that equally applicable in the LLC context? Should it be, especially in Delaware where the LLC is considered to start with a "blank slate" that the parties are free to fashion in their own image with almost unlimited flexibility, by agreement, according to their purpose for their LLC? (But what if there are no applicable terms of an agreement?)
See generally the recent Chancery Court decision in Carlson v. Hallinan, summarized here. In Carlson the court described the extreme circumstances required to appoint a receiver of solvent corporation–mere dissension is not enough. Should that reasoning apply also to an LLC? If dissension is not enough, what about a deadlock? How bad does the deadlock need to be if the business is profitable and doing fine on a daily basis?
Comments are welcome.
Full disclosure: I am in the middle of a case in which the LLC statute’s dissolution provision is hotly contested.