Judicial Dissolution of Trio of LLCs Awarded Notwithstanding the Absence of “Deadlock”

 

Judicial Dissolution of Trio of LLCs Awarded Notwithstanding
the Absence of “Deadlock”

In a summer, 2020 decision, the Court of Appeals reversed the trial court and awarded judicial dissolution of three LLCs (the trial court had denied judicial dissolution of two of the three) were it was clear that the two equal members could not and would not cooperate with respect to management of the LLCs. Unbridled Holdings, LLC v. Carter, 607 S.W.3d 188 (Ky. App. 2020).

Arvin and Carter were the two members of three LLCs, Southern Tax Services, LLC, Kentucky Property Management, LLC and Unbridled Holdings LLC. Each LLC was member managed, and each had unilateral authority with respect to “the ordinary and day-to-day decisions concerning the business affairs” of the LLC. Through the summer of 2015, Arvin manage the day-to-day operations, when the relationship between the two of them broke down over a personal dispute not otherwise related to either company. Arvin wanted to terminate the relationship embodied in the three LLCs, but the operating agreements of each company require the consent of both members to dissolve. Perhaps not surprisingly in light of the breakdown of the personal relationship between the two of them, Carter would not grant consent to dissolution. In consequence, Arvin brought an action for judicial dissolution of the three LLCs.

Arvin based his claim for judicial dissolution on the assertion that it is no longer “reasonably practicable” for he and Carter to operate the LLCs. In each instance, the purpose provision as set forth in the operating agreements enabled each LLC to engage in “all transactions of any or all lawful business for which limited liability companies may be formed under the laws of the State of Kentucky.” While the trial court ordered the dissolution of Southern Tax Services, judicial dissolution of the two other LLCs was denied, the trial court reasoning that there existed no deadlock because the operating agreement enabled each member, acting unilaterally, to carry on the business and affairs of the LLCs. Arvin appealed, arguing that deadlock is not a precondition to judicial dissolution and that doing so would modify the statutory standard of impracticability into a standard of impossibility.

The appellate court noted that the state legislature did not define “not reasonably practicable” and that there were no published cases in Kentucky interpreting the standard. The court looked to decisions in other states, but noted that there was no one definition or standard. Curiously there was no reference made to Blue Equity Holdings Kentucky, LLC v. Cobalt Riverfront Properties, 2019 WL 4127610 (Ky. App. 2019), wherein the “not reasonably practicable” standard was discussed. The court agreed with Arvin that the statute could not mean that it must be impossible to carry on business – if it did, the legislature would have used the word “impossible” instead of “not reasonably practicable.” It was also noted that decisions in other states generally found the standard to be met by circumstances short of general deadlock, and that the Kentucky legislature must not have meant to require deadlock or, again, it would have used the word deadlock.

“Having extensively surveyed case law from other jurisdictions, we believe the ‘not reasonably practicable’ standard requires the trial court to conduct a multifaceted analysis which takes into account a number of different factors that goes well beyond whether there is a technical deadlock.”

The court referenced Gagne v. Gagne, the Colorado case that first considered the “not reasonably practicable” standard under Colorado law, which also stated that impossibility is not required and then laid out several factors to consider. The factors the court in Gagne identified are:

§  Whether the management of the entity is unable or unwilling reasonably to permit or promote the purposes for which the company was formed;

§  Whether a member or manager has engaged in misconduct ;

§  Whether the members have clearly reached an inability to work with one another to pursue the company’s goals;

§  Whether there is deadlock between the members;

§  Whether the operating agreement provides a means of navigating around any such deadlock;

§  Whether, due to the company’s financial position, there is still a business to operate;

§  Whether continuing the company is financially feasible.

The Unbridled court adopted the multifactor approach, indicating it provided the proper amount of flexibility and discretion to order dissolution even in cases that fall short of deadlock or complete frustration of or total impossibility to carry out the purpose of the company. The court then vacated the trial court’s decision and remanded the case to the lower court to determine, based on a new framework developed by the appellate court, whether the impracticability standard had been met.