New York courts are not in the vanguard when it comes to devising less drastic, alternative remedies in LLC judicial dissolution cases.

In their defense, there’s nothing in Article 7 of New York’s LLC Law that expressly authorizes the courts to do so. When a member of a New York LLC brings an action for judicial dissolution, as far as the dissolution statute, Section 702, is concerned, the outcome presents the court with a binary choice: dissolve or don’t dissolve. Unfortunately, unlike its counterpart statute governing close corporations, the LLC Law offers courts no express authority to grant any less drastic remedy such as an elective buy-out.

True, on a couple of occasions New York appellate courts have ordered buy-outs in LLC dissolution cases. In 2004 in Lyons v Salamone, the Appellate Division, First Department ordered a closed auction sale with the two members bidding for each other’s membership interest as an “equitable method of liquidation.” In 2013 in Mizrahi v Cohen, under the unusual facts in that case the Appellate Division, Second Department ordered one 50% member to sell his interest to the other 50% member at a judicially determined value as an “appropriate equitable remedy upon the dissolution of an LLC.”

In neither of those cases was there a “liquidation” or a “dissolution” of the LLC. It’s as if the courts felt compelled to describe the buy-out remedies as such in obeisance to the confines of the statute.

Courts in many if not most other states do not operate under the same statutory confines in LLC dissolution cases. In the 24 states that, so far, have adopted the Revised Uniform LLC Act — proposed RULLCA legislation is pending in 4 additional states — under Section 701(b) courts are given carte blanche to “order a remedy other than dissolution.” The official commentary to Section 701(b) notes that “[i]n the close corporation context, many courts have reached this position
without express statutory authority, most often with regard to court-ordered buyouts of oppressed shareholders.”

At least some non-RULLCA states have statutes that similarly authorize courts to order remedies short of dissolution in LLC judicial dissolution cases. Mississippi is one of them. Section 79-29-805(3) of Mississippi’s Limited Liability Company Act (2010) provides that “[n]othing contained in this section shall diminish the inherent equity powers of the court to fashion alternative remedies to judicial dissolution.”

Colson v Warren

As suggested by the above-quoted commentary to RULLCA Section 701(b), far and away the most common alternative remedy ordered by courts — and for good reason — is the buy-out. But in a recent LLC judicial dissolution case out of Mississippi, that state’s intermediate appellate court upheld an alternative remedy the likes of which I’ve never seen before.

The opening paragraph in the Mississippi Court of Appeals’ opinion in Colson v Warren, 2021-CA-01408-COA (Miss. Ct. App. 2023), tells the basic story underlying the suit:

This case involves a two-person limited liability company and whether it should be dissolved. Its sole asset was a building that was rented to another company. The LLC had the potential to make money from the rent, but it did not have a bank account; it had accrued over $99,000 in undeposited checks. The two owners were split on how the company should proceed; one wanted to dissolve it, while the other wanted to open a bank account, cash the checks, and continue doing business.

The two owners were sisters-in-law who also co-owned the operating company that occupied the building owned by the LLC involved in the suit. Each owned 50% of each company. After some years the relationship between the two fell apart, leading to a mediation and a settlement under which one of them (Warren) bought out the interest of the other (Colson) in the operating company. The settlement however did not address the realty LLC in which they remained 50/50 owners.

But there remained a big problem. As described by the court:

[The operating company] began to write monthly checks pursuant to the now-expired lease to [the realty LLC]. Each month, a check in the amount of $2,750.54 was cut but not deposited. Because there was a problem: [the realty LLC] did not have a bank account, and neither of its two members would reach out to the other to set one up. Tens of thousands of dollars in potential revenue to [the realty LLC] were beyond the reach of the two members because the checks could not be cashed.

But because [the operating company] was claiming the rent checks it was writing were subject to a deduction from taxable income, the two owners of [the realty LLC] were facing the reality that they had to pay taxes on money that did not actually reach their pockets since there was no bank account to receive the funds.

Colson filed a lawsuit to judicially dissolve the realty LLC. Her complaint alleged that Warren abused her authority in the management and operation of the realty LLC and that it was no longer “reasonably practicable to continue to carry on the business.”

Colson and Warren offered conflicting testimony at trial concerning the reasons for not opening a bank account and whether they could get along as co-owners of the realty LLC. Colson asked the trial court to dissolve the realty LLC, stating she would “love” to be bought out but in any event she wanted to put the building up for sale and separate.

The trial court found that the “very limited economic purpose” of the realty LLC could “easily continue to be met without dissolution” and that since the realty LLC did not meet the “extreme remedy” of dissolution, it refused to grant that relief to Colson. Instead, it ordered the two members to open an account at a bank picked by their CPA into which the rent checks were to be deposited.

But the court went much further. Here’s the kicker ordered by the trial judge, as described by the Court of Appeals:

Since [the realty LLC] would continue existing, and in order to avoid another breakdown in communication, the trial court held, “[I]t will be essential in the future for these parties to have [the] benefit of a formal operating agreement for [the realty LLC],” and accordingly the two members were “ordered to immediately retain counsel to negotiate and draft an operating agreement between them, such agreement to be executed by the parties and in place within sixty (60) days” from the trial court’s order.

Prior to reading the Colson opinion, I would not have foreseen a court entering a judgment ordering the opposing parties in a dissolution case — or in any dispute involving an LLC — to negotiate, draft and execute an operating agreement. After all, an operating agreement covers the whole gamut of ownership and management rights and responsibilities, not just maintaining a bank account. I can only imagine the dueling accusations and repercussions that would follow any failure to reach agreement.

Even more amazingly, the Court of Appeals affirmed the trial judge’s order!

First, rejecting Colson’s appeal from the denial of her request to dissolve the realty company, the appellate court held that the realty LLC “has fulfilled its agreed-upon purpose to provide passive income to its two members by renting space to [the operating company].” As it further explained,

The only evidence presented to the trial court of why the business was not operating was the simmering animosity between the partners, which had not only collapsed their joint ownership of [the operating company] but also their family relationship. Both members of [the realty LLC] testified under oath that they would have opened a bank account if the other had agreed and that they wanted to cash the checks that [the operating company] had been drafting and setting aside. . . .

. . . There is no rule that business partners have to like each other, and with a singular focus and paying tenant, [the realty LLC] is meeting the economic purpose for which it was established. We hold it was well within the discretion of the trial court to deny the request to dissolve the LLC.

Second, as concerns the trial court’s remedial order, Warren did not appeal from the requirement to open a bank account, but she did argue that the two members of the LLC should not have to negotiate and enter into a written operating agreement. Colson countered that “[r]equiring the parties to enter into an operating agreement falls under the chancery court’s inherent equitable power and authority.”

In affirming the trial court’s remedial order, the Court of Appeals took a broad view of the court’s power to fashion equitable remedies, writing:

The statute governing judicial dissolution of an LLC expressly declares that “[n]othing contained in this section shall diminish the inherent equity powers of the court to fashion alternative remedies to judicial dissolution.” Miss. Code Ann. § 79-29-805(3). By use of this language, the Legislature recognized the longstanding ability of our chancery courts to balance the interests of parties and find a middle path, which is why our jurisprudence features the maxim “Equity will not suffer a wrong without a remedy[.]” Emmons v. Emmons, 217 Miss. 594, 600, 64 So. 2d 753, 755 (1953).

Ruling in terms of a corporation, not an LLC, the Supreme Court has held that “the more common relief in modern cases is to provide relief alternative to dissolution.” Scafidi v. Hille, 180 So. 3d 634, 652 (¶60) (Miss. 2015) (emphasis added). Like the LLC statutes, corporation law has a statute that declares “Nothing contained in this section shall diminish the inherent equity powers of the court to fashion alternative remedies to judicial dissolution.” Miss. Code Ann. § 79-4-14.34(i) (Rev. 2013); see Boatright v. A & H Techs. Inc., 296 So. 3d 687, 701 (¶58) (Miss. 2020) (citing this statute when upholding a chancery court’s decision to order 50/50 ownership of a company).

This caselaw and these statutes perceive that a chancery court may have to untangle a knot that has formed within an LLC or corporation, and the court’s ability to do equity is undiminished. The trial court expressly relied on those powers of equity.

Despite acknowledging that under Mississippi law, an LLC need not have a written operating agreement, in the absence of which “the general LLC law acts as a gap-filler,” the Court of Appeals heartily approved the trial court’s discretion as a court of equity to require the two sisters-in-law to negotiate and enter into an operating agreement, explaining,

The trial court explained in its opinion exactly why requiring these two members of an LLC to draft an operating agreement was important. The two members, who remained sisters-in-law, had allowed their relationship to deteriorate to the point they had not spoken face to face in nearly ten years and communicated only through lawyers, a CPA, and email. Even though all that stood in the way of them splitting a disbursement from nearly $100,000 in rent checks to [the realty LLC] was a simple bank account, which they both said they wanted, they refused to cooperate long enough to open one. This rift between them halted [the realty LLC] from its full operation as an LLC, and an operating agreement could settle any tensions that might arise in the future. An operating agreement would ratify and codify their sworn testimony at trial that the one purpose of [the realty LLC] was to rent out the property at 102 Upton Drive and pre-empt any future conflict on that point. This decision was within the discretion afforded to the trial court.

I can only conclude that when the Mississippi legislature used the word “nothing” in Section 79-29-805(3) of its LLC Act, providing that “Nothing contained in this section shall diminish the inherent equity powers of the court to fashion alternative remedies to judicial dissolution,” they truly meant nothing.

Finally if you’re wondering if there’s any precedent that outdoes Colson‘s exercise of equitable powers to fashion alternative remedies in a judicial dissolution case, look no further than Colson‘s citation of the Mississippi Supreme Court’s decision three years earlier in Boatright v A&H Technologies, Inc., 296 So.3d 687 (Sup. Ct. Miss. 2020).

That case involved a judicial dissolution suit brought by a 49% shareholder of a close corporation alleging freeze-out by the 51% shareholder. Relying on a provision in Mississippi’s corporation law identical to Section 79-29-805(3) of the state’s LLC Act, the Supreme Court affirmed the lower court’s alternative remedy in lieu of dissolution, requiring the 51% shareholder to transfer for no consideration a 1% stock interest to the 49% shareholder, requiring the company to hire corporate counsel and an accountant, and directing the now 50/50 shareholders to make all hiring and firing decisions together.

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