As mentioned in my earlier post on the Casavecchia v. Mizrahi series of cases, the essence of the Casavecchia’s claims was that
- the LLC had been formed to develop a single real estate development, Hills of the Heartland,
- the development had been completed, and all units sold, and
- instead of distributing profits, the Mizrahi had instead loaned the LLC’s funds to another LLC in which the Casavecchias were not participating.
I have already noted the disconnect between the Casavecchia’s understanding of the parties’ prior practice–one development at a time, and the formation of a new vehicle for new projects–and the breadth of the purpose provision of the LLC’s Operating Agreement.
But here are other puzzling aspects of the trial court’s original order, Cassavecchia v. Mizrahi, No. 008635/2005 (N.Y. Sup. Ct. August 23, 2006) (Warshawsky, J.). At first, it seemed as though Justice Warshawsky had ordered a defacto dissolution of the LLC. In this connection, note that Section 701 only allows voluntary dissolution without a vote of the members only when the organizational documents provide for a time for dissolution, or dissolution on the happening of a specified event. Section 702 of the New York Limited Liability Company Law allows for judicial dissolution at the request of a member "whenever it is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement." To the extent Warshawsky found a limited purpose, he could have found a voluntary dissolution under Section 701 or, perhaps that it was "not longer reasonably practicable" a purpose that had been completed. But that’s not what the order said.
On closer reading, Warshawsky casts the issue as
The issue that emerges for determination is whether a reading of ¶ 8,together with ¶¶ 4, 6 and 9 leads to the conclusion that profits of the Hills of Heartland venture should be allocated and distributed to the shareholders so that they have the right to control their use. See e.g. LLCL § 507, Interim Distributions.
Slip Op., at 3 (emphasis added). Section 4 of the Operating Agreement set forth a broad, rather than a narrow, purpose of the LLC. Id. at 2. Section 6 provides for management by action of a majority in interest, which itself is consistent with the early statement that Mizrahi managed the day-to-day affairs of the LLC. Id. Section 9 provides for distributions "at the times and in the amounts determined by a majority in interest". Id. Section 507 of the New York LLC Law provides for interim distributions to members
to the extent and at the times or upon the happening of events specified in the operating agreement….
Section 8 of the operating agreement provides for the allocation of profits and losses to the members. Slip Op., at 3. Warshawsky then noted the dispute as to the purpose of the LLC, and concluded
While it is conceivable that [LLC] could build homes and lend money out of profits so generated, that plan of operating would have to be approved by all the investors in the venture as they are the lawful beneficiaries of the success of any LLC.
Slip Op., at 4. (emphasis added).
It is clear that, while Warshawsky contemplates interim distributions, the basis for his order of "an inquest … to determine the profits available for distribution" is not entirely clear. Does he deem that the Cassavecchias’ own a majority of interest, so can decide to make distributions? Does he instead believe (wrongly) that allocations under Section 8 give the members the right to distributions? Why else would he suggest that the diversion of profits into a loan would require the approval of all investors?
posted by Gary Rosin
This entry was posted on Tuesday, February 17th, 2009 at 8:06 pm and is filed under Commentary, LLCs. You can follow any responses to this entry through the RSS 2.0 feed.
You can leave a response, or trackback from your own site.
Allocations vs. Distributions. More on Casavecchia v. Mizrahi
As mentioned in my earlier post on the Casavecchia v. Mizrahi series of cases, the essence of the Casavecchia’s claims was that
I have already noted the disconnect between the Casavecchia’s understanding of the parties’ prior practice–one development at a time, and the formation of a new vehicle for new projects–and the breadth of the purpose provision of the LLC’s Operating Agreement.
But here are other puzzling aspects of the trial court’s original order, Cassavecchia v. Mizrahi, No. 008635/2005 (N.Y. Sup. Ct. August 23, 2006) (Warshawsky, J.). At first, it seemed as though Justice Warshawsky had ordered a defacto dissolution of the LLC. In this connection, note that Section 701 only allows voluntary dissolution without a vote of the members only when the organizational documents provide for a time for dissolution, or dissolution on the happening of a specified event. Section 702 of the New York Limited Liability Company Law allows for judicial dissolution at the request of a member "whenever it is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement." To the extent Warshawsky found a limited purpose, he could have found a voluntary dissolution under Section 701 or, perhaps that it was "not longer reasonably practicable" a purpose that had been completed. But that’s not what the order said.
On closer reading, Warshawsky casts the issue as
Slip Op., at 3 (emphasis added). Section 4 of the Operating Agreement set forth a broad, rather than a narrow, purpose of the LLC. Id. at 2. Section 6 provides for management by action of a majority in interest, which itself is consistent with the early statement that Mizrahi managed the day-to-day affairs of the LLC. Id. Section 9 provides for distributions "at the times and in the amounts determined by a majority in interest". Id. Section 507 of the New York LLC Law provides for interim distributions to members
Section 8 of the operating agreement provides for the allocation of profits and losses to the members. Slip Op., at 3. Warshawsky then noted the dispute as to the purpose of the LLC, and concluded
Slip Op., at 4. (emphasis added).
It is clear that, while Warshawsky contemplates interim distributions, the basis for his order of "an inquest … to determine the profits available for distribution" is not entirely clear. Does he deem that the Cassavecchias’ own a majority of interest, so can decide to make distributions? Does he instead believe (wrongly) that allocations under Section 8 give the members the right to distributions? Why else would he suggest that the diversion of profits into a loan would require the approval of all investors?
posted by Gary Rosin
This entry was posted on Tuesday, February 17th, 2009 at 8:06 pm and is filed under Commentary, LLCs. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.