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.
