Judicial Dissolution of LLCs – A Remedy That May Vary From State to State

An intra-corporate dispute can lead to the involuntary, judicial dissolution of a limited liability company (“LLC”).  A logical starting point in which to assess a litigant’s ability to seek judicial dissolution of an LLC is to begin with an analysis of the state’s statute governing the issue.  As outlined below, a litigant’s ability to seek and obtain judicial dissolution can vary dramatically depending upon which state’s substantive law applies. 

A recent posting by Professor Larry Ribstein, found here, describes how judicial dissolution of NY LLCs is guided, in large part, by NY’s black letter law and its emphasis on the LLC’s operating agreement – a largely contractual analysis.  NY’s black letter law regarding judicial dissolution of LLCs provides in part:

§  702.  Judicial  dissolution. On application by or for a member, the supreme court in the judicial  district  in  which  the  office  of  the limited liability company is located may decree dissolution of a limited liability  company whenever it is not reasonably practicable to carry on the  business  in  conformity  with  the  articles  of  organization  or operating  agreement. A certified copy of the order of dissolution shall be filed by the applicant with the department  of  state  within  thirty days of its issuance.

NY Section 702Noticably absent from this NY statute is a reference to a court’s ability to dissolve an LLC when the LLC is suffering from corporate mismanagement / oppression.  In this regard, the Professor’s article identifies a key question:  “The real test will come when the court is faced with a case that is very strong for dissolution on traditional close corporation equitable grounds but where it can find no plausible basis in the operating agreement.”

Unlike the NY provision reproduced above, Iowa law expressly permits a court to dissolve an LLC upon several additional grounds, including when the members and/or managers act in a manner that is oppressive and harmful.  Iowa’s judicial dissolution statute provide in relevant part:

1.  A limited liabilty company is dissolved, and its activities must be wound up, upon the occurrence of any of the following:

d.  On application by a member, the entry by a district court of an order dissolving the company on the grounds that any of the following applies:

(1)  The conduct of all or substantially all of the company’s activities is unlawful.

(2)  It is not reasonably practicable to carry on the company’s activities in conformity with the certificate of organization and the operating agreement.

e.  On application by a member or transferee, the entry by a district court of an order dissolving the company on the grounds that the managers or those members in control of the company have done any of the following:

(1)  Have acted, are acting, or will act in a manner that is illegal or fraudulent.

(2)  Have acted or are acting in a manner that is oppressive and was, is, or will be directly harmful to the applicant.

2.  In a proceeding brought under subsection 1, paragraph “e”, the court may order a remedy other than dissolution.

Iowa Code Section 489.701.  In short, while dissolution of an LLC is a remedy sought by many aggrieved persons holding interests in LLCs, the ability to seek and actually obtain judicial dissolution will likely depend upon which state’s substantive law applies.

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About Matthew McKinney

Attorney focused on civil and commercial litigation.
This entry was posted in Business Owner, Director, Intra-corporate dispute, Litigation, Officer, Shareholder and tagged , , , , , . Bookmark the permalink.

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