More on Purpose

More on Purpose

Last  year, in the Journal of Passthrough Entities, I published a short article on the importance of the “purpose” clause in LLC operating agreement and  similar business entity documents. HERE IS A LINK to that article.  Just before that article was released Peter Mahler, in his blog New York Business Divorce, wrote about the Mace v. Tunick decision; HERE IS A LINK to that posting.  Thanks to Peter’s lead, I was able to incorporation Mace v. Tunick into my article.

 

There have been further developments in the Mace case, and Peter has written about them in a posting titled The Purposeless Purpose Clause Makes a Comeback – Or Does It?; HERE IS A LINK to that posting.

 

Essentially, the LLC at question had a generic purpose clause, allowing it to engage in any activity in which an LLC may engage.  It was created to own the real estate from which a particular business operated.  The minority owner in the operating business eventually retired and was redeemed.  The operating business was then relocated out of state.   The majority owner of the LLC wanted it to remain in business, and he had the LLC lease the property to a third-party, but at a substantially lower rate than it had been receiving.  The minority owner wanted to liquidate the property and receive a liquidating distribution.

 

The plaintiff argued that the facts and circumstances, namely that the LLC’s purpose was to hold and lease property to the operating business, was no longer possible and that judicial dissolution of the LLC should follow.  That position was rejected as the purpose clause in the LLC’s documents was clear an unambiguous and therefore not subject to modification by parol evidence.

 

On that basis the minority member’s petition for judicial dissolution failed. Peter Mahler’s posting provides numerous insights as to the application of this decision.