I've noticed over the many years since this blog's launch a disproportionate number of posts concerning disputes among restaurant co-owners. The only explanation I've come up with is that first-time, start-up restaurant entrepreneurs often are longtime friends or relatives who don't feel the need, or don't have the financial resources, or both, to invest in hiring experienced legal counsel to tailor a well-considered, forward-looking, shareholders or operating agreement.
In one such post a year ago involving a downtown Manhattan restaurant named Tangy Noodle operating as an LLC, a well-known chef who was the minority member and after whom the restaurant was named, petitioned for judicial dissolution based on the managing member's "substantial menu alterations." The LLC had an operating agreement with what I like to call a purposeless purpose clause, stating that the LLC's purpose is to engage in "any legal act or activity." The lower court granted the petition, finding that the restaurant's business was contingent upon the chef's goodwill and therefore the menu alterations rendered the purpose of the business "no longer reasonably practicable" as required by the express terms of the dissolution statute, LLC Law Section 702.
The Expat Case
About a month after the lower court's grant of the dissolution petition in the Tangy Noodle case, a remarkably similar LLC dissolution case captioned Ding v Frank was filed involving an Upper Manhattan restaurant call The Expat. The petition of the 50% member of the member-managed LLC claimed that, amidst faltering negotiations and increasing turmoil over the other 50% member's proposed buyout of the petitioner, the other member made major menu changes that, along with allegations of "freeze-out" and "oppression" made it not reasonably practicable to carry on the business of the LLC.
In another coincidence, the case was assigned to the same lower court judge who, one month earlier, had granted dissolution in the Tangy Noodle case based on menu changes.
Unlike the Tangy Noodle case in which there was an operating agreement with its "any legal act or activity" purpose clause, in The Expat case there was no operating agreement. It's long been settled law that a New York LLC with no written operating agreement is governed by the "statutory operating agreement" consisting of the LLC Law's default rules. While LLC Law Section 201 ("Purpose") states that an LLC "may be formed under this chapter for any lawful business purpose," nowhere in the statute is there a default rule for an LLC's "stated purpose."
The Petitioner Scores an Interim Victory . . .
At case inception the petitioner applied for temporary and preliminary injunctive relief enjoining the respondent from making any further menu changes and restoring petitioner's access to the LLC's banking and other accounts.
Consistent with his then-recent ruling in the Tangy Noodle case, in late May 2024, the judge issued a decision granting in part the motion. Noting the absence of an operating agreement, the judge found that the petitioner "clearly demonstrated" both a likelihood of success on the merits of his claim for co-equal management authority as provided under the LLC Law's default rule, and the prospect of irreparable injury given the "possibility of the restaurant losing its customers and potentially shutting down" as a result of the contested menu changes.
. . . Followed by a Reversal of Fortune
In November 2024, the respondent filed a pre-discovery motion to dismiss all claims in the petition for failure to state viable claims. Respondent argued that he and his wife had been managing the restaurant without petitioner's assistance for about a year; that the restaurant remained profitable; and that petitioner continued to receive monthly distributions.
Respondent also argued that the petition's alleged disputes over menu and other operational changes did not meet 1545 Ocean Avenue's standard for judicial dissolution requiring proof that the LLC's management is unwilling or unable to continue the business or that the business is financially infeasible.
Respondent also cited Section 702 caselaw holding that allegations of freeze-out and oppression do not state valid claims for judicial dissolution.
In opposition, petitioner argued as it had when it sought preliminary injunctive relief, that the business strategy unilaterally implemented by respondent "was completely at odds" with the restaurant's original design and concept, and that it jeopardized the LLC's viability as a going concern.
The court issued its decision last week. Given the court's preliminary injunction ruling last May, finding a likelihood of success on the merits and a probability of irreparable injury, more often than not one would expect the court to deny a subsequent dismissal motion, particularly one that precedes discovery.
Not this time. The court's decision gave the petition short shrift, concluding that the petitioner "has not met his burden in demonstrating that the purpose of the business in no longer practicable"; that "here, the petition does not allege there is any dispute as to the purpose of the LLC"; that petitioner merely contends he "is being 'frozen out' of the business, not that the business is not performing as intended"; and that "[t]o the contrary, the petition alleges that the business continues to perform the services intended by its members, albeit with changes to the menu."
Why the complete reversal of fortune? I've held back mentioning until now the fact that in October 2024, the purposeless purpose clause in the Tangy Noodle case rescued the majority owner when an appellate panel reversed the order granting dissolution and remanded the case for a hearing, finding issues of fact as to whether, mimicking the language of Section 702, "the management of the entity is unable or unwilling to reasonably permit or promote the stated purpose of the entity to be realized or achieved" (italics added).
I have no powers of clairvoyance, but I can't help thinking that the appellate reversal in the Tangy Noodle case may have prompted the lower court judge who presided in both cases to reassess in The Expat case the adequacy of a dispute over a restaurant's menu changes as the central basis for judicial dissolution. I also stake my notion on the passage in the court's decision where it rejects the petitioner's reliance on the appellate decision in the Tangy Noodle case, writing,
While plaintiff attempts to rely on Matter of Chef
Tang LLC v Orchard
Hospitality Corp., 231 AD3d 40, in support of its position
that ambiguity in an operating agreement is analogous to no
operating agreement, therefore a question exists with respect to
the purpose of the subject LLC, the Court does not agree. In
Chef Tang, there was a dispute as to what the stated
purpose was pursuant to the operating agreement, here, the petition
does not allege there is any dispute as to the purpose of the
LLC.
No operating agreement. No purpose clause. No allegation that the LLC's purpose was tied to specific menu offerings. No dissolution.
The Purposeless Purpose Clause, the Absent Purpose Clause, and the Disconnect with the Dissolution Statute
LLC Law Section 702 was modeled on the Revised Limited Partnership Law's provision for judicial dissolution of limited partnerships which, in my travels, typically have a written partnership agreement in which an actual statement of the partnership's purpose is included, for instance, to acquire, lease, manage, sell, etc. a specific real estate investment.
Thirty years after the LLC Law's enactment, we still see many LLCs — especially of the member-managed type — that have no written operating agreement or, if they do, have one of those purposeless purpose clauses mentioned above. When LLCs of that sort are the subject of a Section 702 judicial dissolution petition, the courts are strapped with statutory language and interpretive caselaw that requires them nonetheless to determine if an LLC's "stated purpose" in the operating agreement or articles of formation — never mind, there's no requirement to state the LLC's purpose in the articles of formation — is being met.
The disconnect between the law and the reality will continue to breed uncertainty in cases of this sort. RULLCA's dissolution statute mitigates some (but not all) the uncertainty by also including fraud, illegality, and oppression as grounds for judicial dissolution. Delaware's LLC Act, for better or worse, doesn't require a written operating agreement and thus invites other evidence of the LLC's purpose under its dissolution statute which closely mirrors New York's. Since, unlike most other states, our New York legislature shows no interest in updating our LLC Law, it falls mostly on business lawyers to abandon boilerplate, fill-in-the-blank operating agreements and to convince their clients of the benefits of investing in a carefully considered operating agreement that anticipates the good as well as the future trials and tribulations of multiple member LLCs.
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