Limited Liability Company Dissolution and Award of Counsel Fees
We were engaged by Clients (Clients), two members of a four (4) member single-purpose limited liability company, which acquired an historic residential home in Sag Harbor for the purpose of rehabilitation and resale. Clients were two investor-members of the LLC who committed to funding acquisition and improvement costs. The other two members were father (F) and son (S), and the four parties jointly agreed in the LLC operating agreement that S would act as construction manager overseeing the renovation of the project.
The parties observed formalities and properly conducted themselves by jointly holding meetings and passing resolutions relative to the ongoing project. But an impasse swiftly set in after S negligently failed to secure the historic home to its foundation, causing a variety of structural issues. And then, bad luck took an even worse turn. Unbeknownst to Clients, S was being sued by another homeowner (JC) for negligent and faulty construction practices on his residence. JC obtained a $650,000 judgment against S and started to commence judgment enforcement proceedings against S. At the same time, Clients refused to infuse additional capital into the project because their contributions were not being matched by F and S. Clients requested that the LLC project be liquidated so that each of the parties could recoup their investments and move on.
Fearful that a liquidation would cause his interests to be attached by JC, S devised a scheme to divest himself of his interest by claiming that he transferred it to F. Despite an express clause in the LLC operating agreement requiring any transfer to be made “in writing” and with the “approval of all members,” S filed for chapter 13 bankruptcy and listed in his petition the so-called transfer that he made to F months before the bankruptcy filing. However, the LLC operating agreement expressly stated that the LLC would liquidate and dissolve upon an event of default (which included a bankruptcy filing), and that the voting rights of the withdrawn (bankrupt) member would cease upon said filing. With that, Clients undertook to organize a vote and, as a plurality of members, did in fact vote to liquidate and terminate the LLC. F objected to the termination, and litigation ensued in New York State Supreme Court. Ultimately, the matter was referred to arbitration.
One of the hurdles faced by Clients was the language of the Operating Agreement pertaining to the Arbitrator’s right to award counsel fees. Unlike traditional language granting an award to the prevailing party, the operating agreement here permitted an award of counsel fees based upon the Arbitrator’s express finding of “dilatory tactics” by the non-prevailing party. Hence, it was not just important to prevail in the arbitration: we had to take it one step further by demonstrating that the F/S conduct was bad faith.
Ultimately, the Firm did just that. At the inception of the arbitration, we painstakingly combed through hundreds of emails between the parties and pieced together thirty separate email chains demonstrating the frivolity of F and S’s claims that S “transferred” his membership interests to F. Through extensive cross-examinations during the arbitration hearing, the Firm demonstrated that after the period of S’s so-called “transfer” of his membership interests to F, S repeatedly continued to hold himself out as a “member,” “partner,” “owner” and “agent” of the LLC in email discussions between the four parties. In fact, we also demonstrated that F likewise represented (after the purported transfer) that S was also an owner and member of the LLC.
The effort paid off. The Arbitrator found in favor of our Clients, ordered the liquidation and dissolution of the LLC, and awarded one hundred percent (100%) of Clients’ attorneys’ fees and costs assessed against F and S’s shares based upon their dilatory tactics of manufacturing a false narrative that was designed to evade S’s judgment creditor (JC).
