California lawyer and publisher of The LLC Jungle blog, Kevin Brodehl, recently posted about an interesting decision earlier this month by a California intermediate appellate court in a case called Meads v Driggers.
The case involves a claim by minority members of a California LLC seeking judicial dissolution based on the majority members' alleged improper diversion of profits that should have been split. The majority members counterclaimed for breach of the operating agreement based on its provision stating that the LLC can only be dissolved upon vote of the members or the LLC's bankruptcy.
The operating agreement also included an express waiver of the right to seek dissolution on any other grounds, stating that "[e]ach of the Members hereby agrees not to take any other voluntary action that would cause the LLC to dissolve, notwithstanding any provision of the [California LLC] Act to the contrary."
The minority members moved to dismiss the counterclaim under California's anti-SLAPP statute, arguing it arose out of their right to petition the government for redress of grievances, and that the majority member could not demonstrate a probability of prevailing because the waiver provision was unlawful and/or violated public policy.
The lower court agreed and struck the counterclaim. The majority members appealed. The appellate court affirmed. Here's why:
- California's statute in effect when the operating agreement was entered into in 2011 — California adopted its version of the Revised Uniform LLC Act in 2014 — set forth various grounds for judicial dissolution including the familiar, not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement.
- The Act also stated that the provisions in its chapters governing dissolution "may be varied by the articles of organization or by a written operating agreement only to the extent expressly provided in those chapters."
- The appellate court found that "[n]othing in [the former chapters governing dissolution] expressly provides that an operating agreement may vary the circumstances in which a court may enter a decree of judicial dissolution."
- The court held that "an operating agreement may not vary — or waive — a member's right to seek judicial dissolution in the circumstances identified in [the section authorizing judicial dissolution]."
Critical to the court's analysis was its recognition of the underlying principle that a contract or agreement "contrary to an express provision of law" is unlawful. Because the waiver provision in Meads effectively eliminated the power of the court to decree dissolution in the circumstances authorized by the LLC Act, and because the Act had no provision allowing parties to an operating agreement to vary the dissolution statute, the waiver provision was "contrary to an express provision of law" and therefore void and unenforceable."
Is a Dissolution Waiver Contrary to New York's LLC Law?
What is the state of New York law on dissolution waivers in LLC operating agreements, and how does it stack up against Meads?
The answer is, what little caselaw there is provides little guidance.
In 2008, I wrote about Matter of Youngwall involving a dissolution waiver in an LLC operating agreement, where the trial court held that "[t]he courts of this state have held that to absolutely prohibit judicial dissolution is void and unenforceable as against public policy." For that proposition the court cited a 1996 ruling in Matter of Validation Review Associates, Inc. where the intermediate appellate court held that a provision in a shareholders' agreement waiving common law and statutory rights to seek judicial dissolution of a closely held corporation was void as against public policy. One could argue that Youngwall's reliance on the law governing close corporations is shaky at best.
Then there's the 2017 trial court decision in Advanced 23, LLC v Chamber House Partners, LLC, which I wrote about here, rejecting without any discussion the respondent's argument that judicial dissolution under LLC Law § 702 was unavailable based on a provision in the operating agreement stating that the LLC "will be dissolved only upon the unanimous determination of the Members to dissolve."
Then, earlier this year, the Second Department in the TZ Vista case, which Frank McRoberts wrote about here, held that the subject LLC's members "waived their right to seek judicial dissolution" based on provision in the operating agreement stating, "each Member hereby irrevocably waives any right or power that such Member might have . . . [t]o file a complaint, or to institute any proceeding at law or in equity, to cause the termination, dissolution or liquidation of the Company." As Frank's post notes, the issue whether the waiver provision contravened positive law or public policy was nowhere addressed in the parties' appellate briefs or in the court's decision. Plus, arguably the court's ruling was dicta since it went on to uphold dismissal of the dissolution claim for failure to establish adequate grounds for dissolution.
Let's get back to Meads and whether it can contribute to the inchoate state of New York law on the subject of LLCs and dissolution waiver. What I find interesting about Meads is its focus, not on public policy divined in the penumbra or interstices of a statutory scheme but, rather, in the express language of the California LLC Act's authorizing any variance from its provisions authorizing judicial dissolution "only to the extent expressly provided in those chapters."
New York's LLC Law does not go that far by way of express language, but arguably it arrives at the same destination based on two features in the statute. The more general feature employed by the legislature is the extensive use throughout the LLC Law of the proviso, "except as provided in the operating agreement," to clearly signal whenever the statutory provision establishes a default rule subject to elimination or modification in the operating agreement. A section of the LLC Law lacking such a proviso, such as LLC Law § 702 authorizing petitions for judicial dissolution, logically can be read as a mandatory rule, i.e., not subject to waiver or other modification in the operating agreement.
The more specific feature is found in subsection "(a)" of LLC Law § 417 (Operating Agreement) which provides:
Subject to the provisions of this chapter, the members of a limited liability company shall adopt a written operating agreement that contains any provisions not inconsistent with law or its articles of organization relating to (i) the business of the limited liability company, (ii) the conduct of its affairs and (iii) the rights, powers, preferences, limitations or responsibilities of its members, managers, employees or agents, as the case may be.
I italicized the words, "not inconsistent with law," to test the hypothesis that a dissolution waiver in the operating agreement of a New York LLC, akin to Meads, is "inconsistent with an express provision of law" as pronounced in LLC Law § 702 authorizing an LLC member to apply for a decree of dissolution "whenever it is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement." Is anyone convinced?
I suppose one could distinguish Meads on the basis that there, California law required an affirmative, statutory grant of authority to vary in the operating agreement any provision governing judicial dissolution, whereas the New York statute creates a general, negative rule against inclusion in the operating agreement of any provision "inconsistent with law." Is it a distinction without a difference? Possibly.
On this subject, like most if not all others involving LLCs, I am agnostic. Delaware caselaw, which I wrote about here, long ago upheld anti-dissolution provisions in operating agreements, in the name of freedom of contract. I'm quite alright with that, especially when the agreement is struck between sophisticated parties. I only hope that New York courts someday will grab the opportunity if and when it arises to resolve the issue one way or the other.
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