One Very Messy LLC Freeze-Out Merger

Loyal readers of this blog may recall the powerful victory my firm's client won in 2021 in Farro v Schochet, where the Appellate Division, Second Department broke new ground by holding inapplicable to LLC freeze-out mergers the expansive exception for "unlawful or fraudulent" conduct to the otherwise exclusive appraisal remedy found in Business Corporation Law Section 623(k).

After Farro, the ouster of a troublesome minority member via freeze-out merger is there for the taking, so long as it garners the requisite member approval, follows the straightforward procedural steps dictated by statute, and doesn't run afoul of any constraints in the LLC agreement such as a provision requiring unanimous member consent for any merger.

Over the last five years I've kept my eye open for any new court decisions applying Farro's teaching, with nothing to show for it. Until now. Kinda. It's messy.

The case is pending in Brooklyn Supreme Court, captioned Reich v Purslane LLC.

The Company. Purslane LLC was formed in March 2014. The 2016 Operating Agreement states the purpose of the LLC to engage in the catering business. The oddly formulated cap table attached as Exhibit A shows 800 "shares" of which 200 are "retained by the Company (for future investors)." It lists Akiva Reich and Henry Rich as the LLC's Class A Managing Members holding 400 shares and 201 shares, respectively, shown as 40% and 20.1% "Percentage Ownership," respectively, and six Class B Members holding in the aggregate 199 shares shown as 19.9% "Percentage Ownership" subject to a three-year vesting schedule. As I read the cap table, even assuming the Class B Members are fully vested, based on the number of shares issued Mr. Reich holds a 50% voting interest and Mr. Rich and the Class B Members collectively hold the other 50%.

The Proposed Merger. In November 2019, Mr. Rich sent the members a notice of meeting to vote on a series of proposals including the merger of Purslane into Purslane Boathouse LLC, which was formed in May 2019 in connection with Purslane's bid to provide exclusive catering services at Brooklyn's Prospect Park Boathouse. The proposal included the cash-out of Mr. Reich's interest for "fair value" due to his supposed refusal to cooperate with a necessary capital raise. The notice included among its other proposals: authorizing Mr. Rich "to vote the outstanding 20% of equity shares," apparently referring to the 200 shares listed in the cap table "for future investors"; the "removal" of Mr. Reich's "shares" in the LLC; and the removal of Mr. Reich as manager.

The Offer. Concurrently with the notice, which Mr. Reich later claimed he never received, Mr. Reich received a letter from company counsel accusing him of various improprieties that allegedly rendered Purslane financially and operationally infeasible, and Mr. Reich's interest valueless. The letter offered Mr. Reich $5,000 in exchange for a full release of all claims against Purslane. Mr. Reich rejected the offer.

The Merger's Consummation. The November 2019 notice was approved by all members by written consent, save Mr. Reich. The New York Secretary of State recorded the filing of the Certificate of Merger of Purslane and Purslane Boathouse, with the latter as the surviving entity, over a year later in December 2020. I've seen no explanation for the delay. Since then Purslane is listed as "Merged Out of Existence."

Mr. Reich Sues. In February 2025, Mr. Reich commenced suit in Brooklyn Supreme Court asserting individual and derivative claims against Purslane, Purslane Boathouse, and Mr. Rich. Why five years later? Your guess is as good as mine. The complaint alleges various financial improprieties and breaches of fiduciary duty by Mr. Rich and alleges that Mr. Reich was deprived of his profit share. Most of the complaint's ten causes of action seek compensatory damages or an accounting. Of singular interest here is the Tenth Cause of Action alleging wrongful dissociation and seeking judgment rescinding the merger, reinstating Mr. Reich's membership interest in Purslane, and awarding him a pro rata membership interest in Purslane Boathouse.

Mr. Rich's Motion to Dismiss. I'm focusing only on Mr. Rich's motion to dismiss the complaint's claim for rescission of the merger, which boils down to the following points:

• Mr. Reich held only 40% of the Purslane LLC interests — apparently referring to the 40% interest listed in the Operating Agreement's cap table, or perhaps sub silentio based on the merger notice's proposal to allow Mr. Reich to vote the 20% "retained for future investors" — and thus could be outvoted by the other members in approving the cash-out merger.
• The Operating Agreement and LLC Law authorized Mr. Reich's removal as co-Manager.
• Under Section 6.1(b)(xiii) of the Operating Agreement, the Managers are permitted to "cause the Company to participate in any recapitalization, acquisition, restructuring or merger resulting in the Members receiving the fair market value of their membership interests."
• Mr. Reich's sole recourse under LLC Law Section 1002(g) was to demand a fair-value appraisal proceeding.
• Neither Purslane Boathouse nor Mr. Reich commenced a fair value proceeding, hence under BCL Section 623(h)(2) Mr. Reich forfeited his dissenter's rights.

Mr. Reich's Opposition. Mr. Reich's opposing brief argued in sum and substance:

• The exclusive appraisal remedy in LLC Law Section 1002(g) is subject to that section's express exception "in an action or contest with respect to compliance with the provisions of the operating agreement." Mr. Reich argued that the cash-out merger violated Section 8.1(b) of the Operating Agreement providing that a "Member shall cease to be a Member" only upon the transfer of a Member's interest back to the LLC for the price the Member initially paid for the interest or if the Member files for bankruptcy.
• Mr. Reich further argued that the vote including Class B members approving the merger violated the directive in the Operating Agreement's Preamble, stating that "no Members other than [Messrs. Reich and Rich as the Managing Members] shall have voting rights, powers, control, or influence over the management of Purslane LLC, whatsoever," as echoed in Section 6.1(f) stating that "Members who are not Managers shall not be entitled to vote or otherwise control operation of the Company, to the full extent permitted by the Act and the law."
• Mr. Reich also argued that the vote to approve the merger was invalid because Mr. Rich purported to vote an unassigned 20% of the LLC's interest which, as specified in the Operating Agreement's cap table, was "retained by the Company (for future investors)."

The Court's Decision. The Court's June 2025 Decision and Order, after summarizing the facts and the parties' positions, dismissed a handful of Mr. Reich's non-rescission claims either as duplicative of other causes of action or for failure to state a claim. The Court denied dismissal of the Tenth Cause of Action seeking to rescind the merger, finding that "Defendants fail to establish as a matter of law that [Mr. Reich] is no longer a member of Purslane given the provision in the Operating Agreement governing removal of a member, in particular section 8.1(b)."

Mr. Rich's Follow-Up Motions. Not satisfied with the Court's decision, Mr. Rich took two more, unsuccessful swings at dismissing Mr. Reich's rescission claim. The first was a motion to reargue the Court's June 2025 decision, which the Court denied in a September 2025 Decision and Order finding that Mr. Rich's arguments "merely reiterate the arguments" raised in his original motion which the Court rejected based on Section 8.1(b) of the Operating Agreement. Then came a motion for partial summary judgment declaring that the merger was procedurally proper and enforceable. In a December 2025 Decision and Order denying the motion, the Court commented that it "directly contradicts and attempts to relitigate issues that this Court has already decided twice" and fails to "identify any new facts, change in law, or other extraordinary circumstances that would justify revisiting the Court's prior rulings."

Case Status. Currently, the case effectively is stalled by (1) Mr. Reich's motion to disqualify Mr. Rich's counsel, and (2) Mr. Reich's motion to compel discovery, in which he contends that Mr. Rich refuses to produce any post-2019 documents in contravention of the Court's prior orders keeping alive Mr. Reich's challenge to the merger.

This One's a Doozy. First, I'll share some observations about the issues, then I'll comment on the practical realities.

• As mentioned at the top, Farro teaches that an LLC cash-out merger will be upheld so long as it doesn't run afoul of the operating agreement. Purslane is the first case I've seen that puts Farro's teaching to the test. And what a test it is! While Mr. Reich and the Court's decisions focus on Section 8.1(b), the picture is more complicated than that. There's also the question whether the other members had the required majority voting power to approve the merger. According to the cap table, the only way to get over 50% approval was to issue to one of the other members the 20% "retained by the Company for future investors." Recall that the notice of meeting to approve the merger proposed authorizing Mr. Rich "to vote the outstanding 20% of equity shares." But how, pre-issuance, could that proposal garner approval by a majority in interest? Also query whether under Section 6.1(f) the Class B members were entitled to vote for the proposed merger. Then there's Section 8.1(b) specifying the "only" two circumstances under which a member "shall cease to be a Member." Sounds daunting for Mr. Rich. On the other hand, there's Section 6.1(b)(xii) and (xiii), both of which expressly authorize the managers to undertake a merger "resulting in the Members' receiving the fair market value of their membership interests." Under Section 6.1(a), the other members had the authority to remove Mr. Reich as manager by unanimous vote, without his vote, thereby allowing Mr. Rich to exercise his authority to merge the company. And if the merger was legit, did Mr. Reich lose his right to dissent and demand fair value by waiting five years to bring suit? Sounds daunting for Mr. Reich.
• Let's talk practical realities. I don't foresee a universe in which Messrs. Reich and Rich will ever get back into bed as business partners. Even assuming Mr. Reich wins the case after trial, and even assuming Mr. Rich exhausts his appeals from an adverse judgment, the Humpty Dumpty that fell off the wall in 2019 is not going to be put back together. Too much has changed in the last six years. At best Mr. Reich is looking at a money award. At worst, he's SOOL. And speaking of appeals, in Farro it took three and a half years from when the trial court ruled against my client until the Second Department reversed and upheld the validity of my client's cash-out merger. In the interim, my client incurred a ton of legal fees and countless hours away from their business, dealing with highly burdensome discovery, motion after motion, and other appeals, almost all of which went pfft when we eventually triumphed in the Second Department. Ask any lawyer who's appealed in the Second Department, and they'll tell you a similar story about the lengthy delay before getting a ruling. Given the internal inconsistencies in the Purslane operating agreement, and the duration, costs, and risks associated with both sides' trial and appellate strategies, this is a case that should be settled. I can recommend some good mediators if anyone's interested.

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