Bad Faith, Deadlock and Judicial Dissolution

Bad Faith, Deadlock and Judicial Dissolution

      In his blog New York Business Divorce, Peter Mahler has reviewed a recent decision from New York in which the bad-faith petitioner defense to a proceeding seeking judicial dissolution was applied. That posting is titled The Bad-Faith Petitioner Defense Makes Successful Debut in LLC Dissolution Case; HERE IS A LINK to that post.

      New York has long recognized a defense to an action for judicial dissolution where the owner who is claiming they are being oppressed orchestrated the circumstances. In effect keeping those minority owners from benefiting by their own conduct, “the minority shareholder whose own acts, made in bad faith and undertaken with a view toward forcing an involuntary dissolution, give rise to the complaint-of oppression should be given no quarter in the statutory protection.” Matter of Kemp & Beatley, 64 NY2d 63 (1984).

      In this case, Advanced 23, LLC v. Chambers House Partners, LLC, 2019 NY Slip Op 30173(U) (Sup. Ct. NY County Jan. 22, 2019), the subject LLC owned a five-story mixed-use building in Manhattan. The petitioner, who purchased a 50% interest in the LLC in 2013, was adverse to the other 50% owner, a husband and wife who were 94 and 81 years old respectively. The petitioner had, putting it nicely, been intransigent about certain necessary financings and, in doing so, breached the operating agreement, which provided that one of the purposes of the business was to provide residential housing for the members.

      As noted by Peter in his blog, while the court did not specifically employ the label “bad-faith petitioner” defense, the facts and the holding fall within its scope.