The Crucial Relationship Between Purpose and Judicial Dissolution

The Crucial Relationship Between Purpose and Judicial Dissolution

      Under Kentucky law, a limited liability company may be dissolved upon a showing that it is not reasonably practicable to operate the company in accordance with the operating agreement. In a case recently decided by the Kentucky Court of Appeals, it was held that as what the company is currently doing, namely holding real property for use as a parking lot, that being one of the purposes listed in the operating agreement, no bases for judicial dissolution was shown. Blue Equity Holdings Kentucky, LLC v. Cobalt Riverfront Properties, LLC, No. 2018-CA-001092-MR, 2019 WL 4127610 (Ky. App. Aug. 30, 2019). While this opinion is itself designated as “Not To Be Published,” this appears to be the first ruling of the Kentucky Court of Appeals with respect to the judicial dissolution of an LLC.

      Again, KRS § 275.290(1) provides that an LLC is subject to judicial dissolution when “it is not reasonably practicable to carry on the business of the [LLC] in conformity with the operating agreement.” From there, in this decision, the court focused upon the purpose clause in the operating agreement. It found that the LLC was in fact being operated in conformity therewith. The purpose clause included operating the property as a parking lot, and that is what was being done.  On that basis, the application for judicial dissolution was denied, and the Court of Appeals upheld that determination.

      Peter Mahler, in his (excellent) blog New York Business Divorce, has reviewed this decision in a posting made on September 9 titled Paved Paradise, Put Up a Purposeful Parking Lot; HERE IS A LINK to his posting. As he has already set forth a well-structured analysis to this decision, I will not attempt to repeat his good work.

       That said, purpose clauses are crucial provisions of operating agreements that are often passed over, the agreement reciting only that the LLC “may engage in any lawful activity.” The benefits of greater specificity are a topic I reviewed in an article titled Purpose: If You Don't Know Where You Are Going, How Will You Know If You Have Arrived; HERE IS A LINK to that article.