Wagner LLC Paper - FINAL DRAFT

LLC Law in New York State
Whether it is time to change the laws governing our
Limited Liability Companies and their dissolution
when necessary?
Terrance Wagner
2/29/2016
Discussion regarding New YorkLimited Liability Company Law and whether amendments should
be made to certain sections of the law, especially those relating todissolution and operating
agreements.

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LLC Law in NYS: Whether it is time to change the laws governing our Limited Liability
Companies and their dissolution when necessary?
I. Introduction
A. Background of Limited Liability Company Law and Business Corporation
Law in New York State
For over 30 years the New York Court of Appeals has been instrumental in developing
the legal structure with respect to the creation of businesses, allowing them to grow into
flourishing enterprises through the use of nationally known business models.1 In addition, the
New York State (NY/NYS) legislature has also assisted in developing laws which affect the way
business is conducted. Although companies in recent years have adapted to the constantly
changing business environment both locally and abroad, they are still impacted both positively
and negatively based on the change in the laws which govern them.
The types of organizations that can be formed in New York State include Corporations
(both S-Corporations and C-Corporations which are based on tax status), General Partnerships or
Sole Proprietorships; yet forming a Limited Liability Company is often seen as the best option if
available when forming any entity. The Limited Liability Company (LLC)2 law was first created
in Wyoming in 1977, and later adopted in statute in New York in 1994, to assist companies and
provide the greatest amount of protection to the managing members who control a corporation.
A LLC is an unincorporated business entity that is comprised of members, which then provides
limited liability for contractual obligations and other liabilities of the business. This LLC model
was developed by combining the liability model found in a corporation and joining it with the
1 See e.g., Tzolis v. Wolff, 884 N.E.2d 1005 (N.Y. 2008); Meinhard v. Salmon 164 N.E. 545 (N.Y. 1928)
2 New York Limited Liability Company Law.

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flexibility often seen in a partnership model.3 The creation and formation of Limited Liability
Companies are statutorily governed by the Limited Liability Company Law of NYS. LLC’s must
also operate as per their written Articles of Organization which is required to be filed with the
Department of State pursuant to § 203 of the LLC Law while also creating an operating
agreement for internal use by the company. 4
Once created, the investors of the limited liability company are known as members rather
than shareholders or partners. Members can include any legal entity, an individual, a
corporation, a partnership or even another limited liability company.5 Following the formation of
a limited liability company, Section 206 of the LLC Law which governs the publication
requirement, states that the LLC must publish their Articles of Organization or notice of the
formation of the LLC in two newspapers for six consecutive weeks. The newspapers which must
be used for the publication, while not a standard practice for a LLC to be formed in every state,
are designated by the county clerk of the county where the LLC is located.6
Although there are many benefits of forming a LLC, the Limited Liability Company Law
in New York State has presented a variety of major problems to companies, including issues
relating to publication requirements, whether courts can issue a charging order, whether creditors
can foreclose on a membership interest in a LLC, and most importantly the issue which arises
when discussing dissolution.7 Even though the creation of a LLC allegedly provides the most
protection to the organization regarding potential liability to its members, some members have
3 New York Department of State, Limited Liability Companies, http://www.dos.ny.gov/corps/llcguide.html.
4 Id.
5 New York Department of State, Limited Liability Companies, http://www.dos.ny.gov/corps/llcguide.html.
6 NY Ltd. Liab. Co., § 206.
7 Miller, Meredith R. (2015) “The New York Limited Liability Company Law at Twenty: Past, Present & Future,”
Touro Law Review: Vol. 31: No. 3, Article 9.

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been in many ways disadvantaged due to the ambiguity in the law and disagreements among the
courts when discussing the breaking down and dissolving of the company.
In addition to the Limited Liability Company Law governing limited liability companies,
many courts (see, e.g., Scibelli v. Beacon Building Group; Tzolis v. Wolff)8 will also look to the
Business Corporation Law (BCL)9 or Partnership Law (PTL)10 of New York State when the LLC
law lacks information to provide guidance on certain issues relating to LLC’s. The BCL/PTL
was created to primarily govern business entities throughout the state and addresses a multitude
of issues relating to corporations in New York including formation, proper incorporation and too
often critical the topic of dissolution. Dissolution guidelines in both LLC law and BCL/PTL
have become highly contested issues since some courts see it as inappropriate to look to the BCL
or PTL on an issue which is vague in the LLC law. With regards to the issue of dissolution there
have been major cases including re 1545 Ocean Ave, LLC,11 Doyle v. Icon, LLC12, re Eight of
Swords, LLC13, Flax v. Shirian14, Schindler v. Niche Media Holdings,15 Scibelli v. Beacon
Building Group16 and Tzolis v. Wolff.17 In each of these cases the courts in most cases have
taken similar stances, although different approaches, regarding the proper application of the
dissolution laws as they relate to limited liability companies. Some may argue that it is within the
court’s discretion to interpret the current law and where there is vagueness or ambiguity allow
the court to look to other sources or case law to resolve the issue presented. However, some may
8 Tzolis v. Wolff, 884 N.E.2d 1005 (N.Y. 2008); Scibelli v. Beacon Building Group, LLC, 2014 NY Slip Op 24199
[Sup. Ct., Queens County 2014], withdrawn.
9 N.Y. Business Corporation Law § 1102-§1106.
10 N.Y. Partnership Law
11 In re 1545 Ocean Ave., LLC, 72 A.D.3d 121, 893 N.Y.S.2d 590, 2010 N.Y. Slip Op. 00688
12 In re Doyle v. Icon, LLC, 103 A.D.3d 440 (1st Dep’t 2013).
13 In re Eight of Swords, LLC, 96 A.D.3d 839 (2d Dep’t 2012).
14 In re Flax v. Shirian, 44 Misc.3d 1222(A) (Supt. Ct., Suffolk County 2014).
15 In re Schindler v. Niche Media Holdings, 1 Misc.3d 713 (Sup. Ct., New York County 2003). (Distinguished by
Tzolis v. Wolff)
16 In re Scibelli v. Beacon Building Group, LLC, 2014 NY Slip Op 24199, withdrawn.
17 In re Tzolis v. Wolff, 884 N.E.2d 1005 (N.Y. 2008)

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not agree with this approach and argue that the main problem is the lack of action taken by the
New York State legislature over the last 15 years in order to clarify the ambiguity in the law.
One way this could be done is by simply creating a clear legal standard for companies and courts
to follow when discussing dissolution. Therefore, we must determine whether following a
court’s ruling, we should rely on businesses and the academic legal community to recommend
that the legislature take action to resolve this issue via legislation or; should we continue to
follow the court’s interpretation of the statutes and decide if dissolution is warranted as they see
fit in each case, unless there is a decision from a higher court overruling a lower court’s holding.
B. Amendments to NYS LLC law
Each year the New York State legislature discusses an abundance of amendments
addressing existing laws relating to the issues of healthcare and education to local traffic laws.
Yet, one area that is often overlooked are amendments to laws relating to businesses and the
components which should be taken into account when discussing issues of creation, formation,
operating guidelines and if necessary the winding up of a business, specifically the dissolution of
a limited liability company.18 Since 1994, there have been very few changes to the LLC law
including changes to address the dissolution of a company when (1) they don’t have a dissolution
standard in their operating agreement. Although an operating agreement may be made by an
LLC, a section of the agreement dedicated to the dissolution of the company is often left out. In
addition, the LLC law includes “not reasonably practicable” language relating to dissolution
which leads to the problem that (2) the elements adopted by the court to determine if dissolution
is warranted under the LLC law are sometimes too vague when applying the facts in the current
18 State of New York Legislative Digest, Legislative Bill Drafting Commission (January, 2014- June, 2015) Vol. I
& II.

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situation.19 In order to effectively determine whether the facts in any particular case meet the
proper requirements, we must first look to the Limited Liability Company Law, and its
corresponding articles and sections that govern dissolution.
II. Dissolution of LLC in NYS
A. Requirements for dissolution under NYS LLC law
Under Article VII of the NY Limited Liability Company Law, a limited liability company
is dissolved and its affairs will be determined finished when the first of the following
occurs:20
(1) the latest date on which the limited liability company is to dissolve, if any,
provided in the articles of organization, or the time specified in the operating
agreement, but if no such date is provided in the articles of organization and if no
such time is specified in the operating agreement, then the limited liability
company shall have a perpetual existence;
(2) the happening of events specified in the operating agreement;
(3) subject to any requirement in the operating agreement requiring approval by
any greater or lesser percentage in interest of the members or class or classes or
group or groups of members, the vote or written consent of at least a majority in
interest of the members or, if there is more than one class or group of members,
then by at least a majority in interest of each class or group of members;
(4) at any time there are no members, provided that, unless otherwise provided in
the operating agreement, the limited liability company is not dissolved and is not
required to be wound up if, within one hundred eighty days or such other period
as is provided for in the operating agreement after the occurrence of the event that
terminated the continued membership of the last remaining member, the legal
representative of the last remaining member agrees in writing to continue the
limited liability company and to the admission of the legal representative of such
member or its assignee to the limited liability company as a member, effective as
of the occurrence of the event that terminated the continued membership of the
last remaining member; or
(5) the entry of a decree of judicial dissolution under section seven hundred
two of this article.
19 Shanahan, Nolan and Meglino, David. (2015) “LLC Dissolution: A More Demanding Process,” New York Law
Journal.
20 NY Ltd. Liab. Co., § 701 (a).

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Under each of these standards, a limited liability company must show that the facts apply to at
least one of these requirements. However, in some cases companies may lack operating
agreements and even if there is an operating agreement they are silent on the issue of
dissolution21, making elements (1)-(4) unavailable to a company attempting to dissolve a
company. Companies in this situation are left only with element (5) that involves the dissolution
of a LLC through decree by the court governing the location of the LLC. Currently element (5) is
the most relied upon element when addressing the matter of dissolution and has created
numerous problems. One of the biggest problems of § 701 and § 702 is the absence of language
discussing a petition for dissolution based on fraud, illegality or oppression which is permitted
for closely held corporations.
B. Lack of language discussing petition for dissolution based on fraud, illegality or
oppression in the LLC law as permitted in the BCL for closely-held corporations
According to § 1104-a of the Business Corporation Law, shareholders who hold twenty
percent or more of all outstanding shares, may petition for dissolution of a closely-held
corporation if they feel that those in control of the of the corporation, including directors or
officers, are guilty of illegal, fraudulent or oppressive actions toward the complaining
shareholder(s) or if assets of the corporation are being wasted or diverted for non-corporate
purposes by those individuals who are in control of the corporation and its funds.22 Although the
BCL addresses this issue with regards to incorporated entities, the LLC law is completely silent
on the issue of dissolution for fraud, illegality or oppression. Therefore, when members are
21N.Y. Department of State, Articles of Organization Form http://www.dos.ny.gov/forms/corporations/1336-f.pdf.
22 N.Y. Business Corporation Law § 1104-a (1) & (2).

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faced with problems in a company arising from illegal acts including fraud and oppression, they
are left with few options to assist them in resolving the situation. The only way to resolve the
issues, absent a provision in the operating agreement or articles of organization, is to request to a
judicial dissolution under § 701(a)(5) & § 702 of the LLC law. 23
C. Judicial dissolution standard under NYS LLC law
§ 702, Judicial Dissolution: On application by or for a member, the supreme court in the
judicial district in which the office of the limited liability company is located may decree
dissolution of a limited liability company whenever it is not reasonably practicable to
carry on the business in conformity with the articles of organization or operating
agreement. A certified copy of the order of dissolution shall be filed by the applicant
with the department of state within thirty days of its issuance.
Some courts have had difficulty addressing judicial dissolution due to the LLC law having a
different approach to the issue. These courts have looked to BCL § 1104-a and used this statute
to fill in the gaps that remain regarding the situations of fraud and oppression. Section 702,
states in pertinent past that “the Supreme Court in the judicial district…which the limited
liability company is located may decree dissolution whenever it not reasonable practicable to
carry on the business in conformity with articles of organization or operating agreement.” 24 The
lack of definition in the LLC law of the true meaning of “not reasonably practicable to continue
business” has led the courts to interpret its meaning on a case by case basis and has lead to
conflicting interpretations of this standard.
i. Lack of meaning in the “Not Reasonably Practicable” Portion of Law
A black latter interpretation of “not reasonably practicable” has not been defined in LLC
Law nor have any specific grounds been established which will allow for dissolution using this
23 NY Ltd. Liab. Co., § 702.
24 NY Ltd. Liab. Co., § 702.

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factor. In most cases due to the lack of clarity in § 702, courts have applied the broader
dissolution application for corporations and partnerships to cases involving LLC’s.25 Before the
case of 1545 Ocean26, courts would apply the “not reasonably practicable” standard if a member
alleged fraudulent and oppressive conduct, if the LLC was in debt and when there was a conflict
or disagreement between the members regarding the management and viability of the LLC.27 In
addition, courts have also ruled that dissolution would be warranted if there was an inability for
the LLC to continue business and function, as well as a clear lack of the LLC showing profits in
their respective market. These elements have been used to determine whether or not the LLC has
effectively met the standard of “not reasonably practicable” to continue doing business.28 One
example is in the case of Schindler v. Niche Media Holdings29, where the Supreme Court held
that “reasonably practicable meant the business ought to be dissolved if unable to function as
intended, or else that it is failing financially.” Some courts have believed the court’s holding in
Niche Media, where the court interpreted “reasonably practicable” to include, (1)whether the
business can continue to function or (2) permit dissolution based on the financial status; are only
a few factors that should be considered when deciding dissolution, including under a judicial
decree. However, the case in re 1545 Ocean, was the first seminal appellate decision which
addressed the issue of judicial dissolution under LLC law and established a two-prong test for
future cases. 30
25 Shanahan, supra note 19, at 1.
26 1545 Ocean, 72 A.D.3d at 121.
27 Id.
28 1545 Ocean, 72 A.D.3d at 123.
29 Niche Media Holdings LLC., 1.Misc.3d at 716.
30 Shanahan, supra note 19, at 1.

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D. Cases involving the problems when dissolving a LLC
In 1545 Ocean, the Appellate Division, Second Department, was the first court to issue a
ruling which gave a specific and in-depth interpretation of the “not reasonable practicable”
standard. The court had ruled to limit § 702 and offered an explanation that although both LLC’s
and corporations may do similar business, the dissolution rights which are granted to them under
their respective laws are greatly different.31 The main issue the court believed must first be
addressed in determining whether dissolution is warranted was whether it is contractually
warranted as written in the operating agreement or articles of organization. Where the operating
agreement or articles of organization are silent on the issue of dissolution, the court will then
look to the LLC law to determine how to proceed. Section 702 has a narrow view on dissolution
rights and strictly permits it to occur if: “(1) the management of the entity is unable or unwilling
to reasonably permit or promote the state purpose of the entity to be realized or achieved; or, (2)
the continuing entity is financially unfeasible”.32
The primary issue in re 1545 Ocean related to whether judicial dissolution was permitted
when the two members, Van Houten and King, could not mutually agree on matters relating to
their LLC. The operating agreement in this case was absent any provision on dissolution and
allowed either of the two members to take action which was permitted under their agreement.
The main purpose of the LLC was to purchase existing buildings in Bohemia, N.Y. and then
renovate them while also building a second building for commercial rentals. The tension which
grew between the two managers included Van Houten hiring is own construction company to
perform the demolition and then reconstructing the existing building without approval by King,
who then blamed Van Houten for charging more for the work than was warranted. King also
31 1545 Ocean, 72 A.D.3d at 127-128.
32 Id at 131.

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alleged that Van Houten would not meet regularly to discuss business issues and continued
conducting the business of the LLC without King’s input.33 Due to the foregoing issues, King
wanted to dissolve the LLC after an attempt to be bought out by Van Houten failed, due to a lack
of agreement on the buy-out price. In situations such as these, the court in the past looked to the
BCL or Partnership law for clarification of whether this problem would meet the requirements
necessary to allow dissolution. The lower court had granted dissolution, but when addressed by
the Appellate Division, the decision was reversed in addition to the petition for dissolution and a
special proceeding being denied.34
The Appellate Division first examined § 702 and had determined there was nothing to
warrant the application of dissolution provisions under the BCL or Partnership law and apply it
to the LLC.35 Additionally, applying the BCL and Partnership Law to a LLC would not be
permissible under the law since limited liability companies are statutorily dissimilar as compared
to corporations and partnerships, as well as the laws governing the dissolution of these
organizations. The court in this case had difficulty applying § 702 of the LLC law since the
legislature in 1999 did not address the provisions regarding dissolution even though many other
areas were modified with respect to changing times. Due to the strict readings and differences
of the laws, the court decided to interpret § 702 literally through its meaning that dissolution is
contingent on whether the company is able to function through conforming to either the
operating agreement or articles of organization. The court looked to whether the operating
agreement and the ability of 1545 Ocean LLC to continue to function and meet its purpose based
on the agreement was possible. Therefore, the court determined that they must apply a
“contract-based analysis” and determine if the dispute between the parties was so intolerable as
33 Id at 123-124.
34 Id at 127-128.
35 Id at 126-127.

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to prevent them from functioning under their operating agreement.36 Based on this analysis and
the interpretation of the court in Niche Media Holdings37, the court in 1545 Ocean concluded that
the only basis which can be used to decide whether dissolution is warranted is if the company
cannot effectively continue to operate and meet the purpose to which they were originally
created as stated in the operating agreement. Under this analysis, the court created a two part
standard of determining “not reasonable practicable”. The petitioning member, in this case King,
must show and prove that either, “(1) the management of the entity is unable or unwilling to
reasonably permit or promote the state purposed purpose of the entity to be realized or achieved,
or, (2) continuing the entity is financially unfeasible”.38
Due to the lack of case law from New York courts, specifically that which refers to types
of conduct that meets the “not reasonably practicable” standard, courts looked to neighboring
states case law. States like Michigan, Virginia, Delaware and other jurisdictions suggested that
mere disagreements, misconduct or even comingling funds is not sufficient enough grounds to
meet a “not reasonably practicable” standard.39 However, if there had been allegations of
violence or if a member was expelled for no good reason, then the petitioning member would
meet the “not reasonably practicable” standard , but courts including those in New York,
continued to fail and give a clear definitive level of conduct that would meet the burden for
dissolution.40
Since Van Houten and King were able to continue to run the company even though they
disagreed on the way to manage the LLC, and since the business met the purpose of demolition
36 Id at 128.
37 Niche Media Holdings LLC., 1.Misc.3d at 716.
38 Id at 131.
39 Shanahan, supra note 19, at 3, citing Matter of Arrow Inv. Advisors,LLC, 2009 WL 1101682 at *2 (Del. Ch.
2009); Dunbar Group, LLC v. Tignor, 593 S.E.2d 216, 219 (Va. 2004); Kirksey v. Grohmann, 754 N.W.2d 825
(S.D. 2008); Taki v. Hami, 2001 WL 672399 at *3 (Mich. 2001)
40 Id.

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and rehabilitating buildings, King could not meet the first element established by the court. In
addition, Van Houten was allowed, as per the agreement, to take unilateral action without
approval of King. The court maintained that Van Houten’s actions of ignoring his co-manager
and operating the business as he saw fit wasn’t a ground for dissolution because his conduct was
permitted under their operating agreement, in addition to no dissolution standard being adopted
in the agreement.41 In reference to the second element, although King was not happy with the
pricing of the construction, the actions by Van Houten did not appear to be egregious enough and
was well below the standard necessary to show the entity was financially unfeasible. With these
facts and due to the work of the company continuing, the second element was not met either
leading to the court’s denial of the petition for dissolution.
In his concurring opinion, Justice Steven Fisher agreed with the way in which dissolution
of a LLC should be approached by not following the BCL or Partnership law, yet his
interpretation of “not reasonably practicable” under § 702 was more realistic. Justice Fisher
believed that a court must look to the disagreements or conflicts that arise among members
regarding the means, methods, or finance of company operations and should thus apply these
factors to whether it is feasible to continue to allow the LLC to operate. But after all the facts
were presented, the most impeding factor which prevented the dissolution was the lack of
language found in the operating agreement.42
After the court’s decision in 1545 Ocean, and subsequent cases on this issue, the one
common factor found is that without proper dissolution language found in the operating
agreement, dissolution will most certainly be denied. The First Department court in Doyle v.
Icon, LLC adopted the dissolution test from 1545 Ocean, and denied dissolution under § 702 due
41 1545 Ocean, 72 A.D.3d at 125, 131.
42 Id at 133.

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to the fact that the company was able to carry on their business as stated in their articles of
organization.43 The court ruled their decision was plausible despite the fact that the petitioning
member alleged he was expelled and didn’t receive his share of the profits. Furthermore, even
though the member petitioning dissolution did not receive his share of profits, the company was
still financially feasible and dissolution wasn’t warranted under the second factor. The First
Department applying the facts found by the Second Department in 1545 Ocean set a stronger
precedent for future courts to adopt the same two pronged test to use when deciding whether to
grant a petition for judicial dissolution. 44
In the case of Eight of Swords, LLC from the Appellate Division, Second Department,
the court was presented with the dilemma of whether to allow the petition for dissolution by a
minority member of an LLC, which was operating without an operating agreement, claiming that
she was shut out of management of what was “intended” to be member-managed.45 The court
used the same elements presented in 1545 Ocean to determine whether or not dissolution was
permitted. The court had to decide whether the company could continue operating for its
intended purpose despite the shut out, and if so was it financially feasible to deny the petition.
Based on these factors, the court decided that despite the shut out of the minority member and
her allegation that the purpose of the LLC was to include allocation of management
responsibilities of the members, the petition for dissolution was denied. The court relied heavily
on the fact that there was no operating agreement between the members and they could not
consciously take the word of one member over another despite the shut out.
43 Doyle, 103 A.D.3d at 440.
44 Id.
45 Eight of Swords, LLC, 96 A.D.3d at 840.

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In the case of Flax v. Shirian, the court’s issue was whether the actions of the members of
the LLC regarding the company’s business violated the operating agreement.46 Court’s prefer to
look to an operating agreement when deciding whether to allow a petition for dissolution,
primarily because the main purpose of the operating agreement is to allow a company to run
smoothly and in some cases, determine how to proceed when conflicts arise during the course of
normal business of the LLC. In re Flax, the operating agreement required unanimous consent
between the members, and further stated that any dispute that “prohibits the proper continuation
of the company’s business will result in the company being dissolved”. 47 Due to the wording
relating to dissolution in the LLC operating agreement that when there is a lack of unanimous
consent based on intractable disputes, dissolution was automatically triggered. The court did
note in absence of an operating agreement, the judicial dissolution would have been denied since
the company would have been likely to continue to do their business.48
Another case which allowed judicial dissolution of a LLC comes from the Supreme Court
of South Dakota in the case of Kirksey v. Grohmann, where two of four members of the LLC
wished to dissolve the company due to the belief that the economic purpose of the LLC was
unreasonably frustrated and it was not “reasonably practicable” to carry on the company’s
business in conformity with the articles of organization and the operating agreement. In this case
four sisters inherited equal ownership in their family’s land and formed a LLC to engage in a
livestock and ranching operation.49 The votes to dissolve the LLC were 2-2, and since there was
no provision regarding a deadlock in the operating agreement when facing the issue of
dissolution of the LLC, the ultimate decision as to permitting dissolution was left to the court to
46 Flax v. Shirian 44 Misc.3d at *1.
47 Id at *2.
48 Id at 7.
49 Kirksey v. Grohmann 754 N.W.2d 825 (S.D. 2008).

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decide. 50 In addition, the court hinted at another approach to interpreting statutory language in
the LLC law is by comparing the language to that found in the dissolution of a corporation under
the state’s respective BCL.51 This idea is noteworthy because unless a court can develop an
accurate test to follow, application of a BCL standard can sometimes be wise in order to serve
the best interest of the members seeking dissolution.
i. Specific cases which looked to use BCL to clarify vagueness in LLC
law
In two cases, although one was withdrawn, the court chose not to look to the LLC law of
NYS due to its vagueness and rather adopted the law of the BCL to apply certain standards to
cases involving LLC law. Although the court erred in one case, causing the opinion from the
case to be withdrawn, this allowed for the thought of applying the law of one specific area to that
of another in order to fill in gaps left by the legislature. In the case of Scibelli v. Beacon
Building Group, LLC, the court applied for the first time, in poor choice, both the LLC law and
BCL for a limited liability company.52
In this case, a member who owned 25% of the LLC petitioned for dissolution against the
respondent member who owned the remaining 75% interest in the LLC. The petitioner stated,
with no argument from the respondent, that the LLC had conducted no new business recently;
the respondent had failed to pay the company’s credit card debt and cut off the petitioner’s bank
account access for the LLC along with his access to the company financial records.53 In addition
to all the aforementioned, the petitioner had not received a salary or benefits as he was entitled,
while the respondent was still paying himself along with his family members. The petitioner
50 Id. at 827.
51 Id. at 829.
52 Scibelli v. Beacon Building Group, LLC, 2014 NY Slip Op 24199, withdrawn.
53 Id.

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requested a judicial dissolution, since the operating agreement stated that dissolution will be
done either through a vote of members owning a majority of membership interests or dissolution
pursuant to § 702 the Limited Liability Company Law.54 Due to the petitioning member holding
a minority interest, petitioner moved to dissolve pursuant to the guidelines of LLC law § 702 as
allowed in the operating agreement and under BCL § 1104-a.55 Typically a court will not address
the BCL in cases relating to LLC’s due to the entities having separate laws for a reason.
However, in this case the court addressed both of the statutes addressed by the petitioner, but the
opinion was later withdrawn and highly criticized for the inappropriate action of following the
BCL § 1104-a standard for dissolution of a LLC.
The court first applied the LLC law § 702 and followed the two-pronged test which was
established in 1545 Ocean regarding the “not reasonably practicable” standard.56 The issue in
this case would be that the petitioner must prove that the management of the LLC is unable or
unwilling to reasonably permit to promote the purpose of the entity to be achieved, or that
continuing the business will be financially unfeasible. Due to the purpose of the company being
to conduct, “any lawful business” and they were currently conducting no business, in the process
of winding down and were only collecting monies owed for already completed projects, the first
prong was easily satisfied.57 With regards to the not financially feasible prong, although there
was no clear definition by the Appellate court, the mere facts that there was a lack of new
business being conducted, constant misuse of company funds and inability to pay bills, it was not
financially feasible for the two members to continue operation of Beacon LLC. Although the
dissolution standards required under § 702 were clearly satisfied under both prongs and only one
54 NY Ltd. Liab. Co., Law § 702
56 Id.
57 Id.

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prong was required to be met, the court still addressed the dissolution under § 1104-a of the
BCL.
Under § 1104-a of the BCL regarding dissolution, one of the following two elements
must be met by the petitioning member: “(1) the directors or those in control of the corporation
have been guilty of illegal, fraudulent or oppressive actions toward the complaining
shareholders; [or] (2) the property or assets of the corporation are being looted, wasted, or
diverted for non-corporate purposes by its directors, officers or those in control of the
corporation.”58 The court stated that although these standards apply to non-LLC entities, the fact
that the petitioning members was a minority member owning more than 20%, the BCL could
apply to this case to help guide dissolution proceedings. In the case with Scibelli, the majority
owning member Bilesi was withholding due payment to Scibelli for work performed for the
company, he denied access to Beacon bank accounts and financial records, didn’t pay debts
owed by the company and was using corporate money for his personal use. Due to these facts
not being contested by Bilesi, Scibelli’s prima facie argument satisfied the first prong under BCL
§ 1104-a. Under the second factor for allowing dissolution pursuant to BCL § 1104-a, the
member must show a misappropriation of corporate funds for private use. Once again Bilesi
again didn’t contest the statements by Scibelli stating that Bilesi was using the company funds to
benefit not only himself but also his family members clearly shows a waste of corporate assets.59
Therefore, under these undisputed facts Scibelli will also satisfy the second factor, which will
allow for dissolution under the BCL.
Another instance of applying the BCL to a LLC relates to the question that has arisen as
to what extent fiduciary duties may be prospectively waived with regards to a LLC in such cases
58 N.Y. Bus. Corp. Law § 1104-a.

Wagner 19
that the law is absent a provision concerning a derivative action.60 In Tzolis v. Wolff, the court
looked to adopt a BCL standard of law due to the absence of a similar provision in the LLC law.
Here the court was faced with the issue involving a minority member of a LLC who brought a
derivative action on behalf of the LLC, alleging breaches of fiduciary duty in connection with the
sale and lease of the LLC’s apartment building.61
The plaintiff in this case, Soterios Tzolis, brought an action on behalf of himself and
Pennington Property Company, LLC, stating that members in control of the LLC arranged to
lease and sell the LLC’s primary asset for under market value, breaching fiduciary duties and
causing harm to the LLC. However, the Supreme Court denied the action stating that NY law
doesn’t permit members to bring a claim on behalf of a LLC.62 The Appellate Division later
reversed this decision and on appeal the Court of Appeals affirmed the Appellate Court decision
stating that a LLC member may bring a derivative claim for the LLC even though the legislature
omitted this idea when the LLC law was enacted in 1994.63 The court cited the BCL and the rule
that a derivative suit can be brought against a corporation and that the mere absence of such a
provision in the LLC law does not bar the action from being brought.64 In addition, the court also
noted that the use of corporate assets to enrich corporate fiduciaries is unacceptable, as it was in
past cases, and the mere omission of derivative suits in LLC law is not enough for the court to
not address the problems and abolish the action when discussing a LLC.65 In part, the legislature
could be deemed partially responsible for the derivative action portion of the LLC law being
absent due to a failure of the NY Senate to pass a version of the LLC law addressing Derivate
60 Jack Graves & Yelena Davydan, Fiduciary Duties of LLC Managers:Are They Subject to Prospective Waiver
under the New York LLC Statute?, 31 TOURO L. REV 439 (2015).
61 In re Tzolis, 884 N.E.2d at 1.
62 Id. at 2
63 Id.
64 Id.
65 Id. at 3

Wagner 20
Actions, while the Assembly addressed it. 66 The court noted that in several other cases, like
Robinson v. Smith67, that the absence of a specific provision shouldn’t bar the action from being
brought, especially in cases when the BCL has addressed a similar issue with regards to
corporations.68
Here the court’s analysis of the BCL as applied to a limited liability company was
essential to promote business in NY, as it allowed the court to shed light on the lack of support
that the LLC law provides for members of an LLC especially when faced with fraudulent activity
or in the event of wishing to bring a derivative suit on behalf of a company. As evidently
portrayed in Tzolis, the Court of Appeals noted that the absence of a provision in the LLC law
should not prevent certain actions to be brought especially when the harm to the LLC can be
potentially damaging to its future existence. These decisions, primarily with regards to the
opinion made by Judge Smith in Tzolis allowing the court to adopt a provision from a different
area of law to fill in gaps left in another, focuses the pressure on the legislature to determine
whether or not there is a need and/or desire for amendments to be made to our current LLC
laws.69
E. Whether the courts should continue to interpret the adopted requirements
needed for dissolution of a LLC or should the Legislature amend the current law
Based on the previous case law and lack of attention by the legislature, it seems as if
allowing the courts to continue to interpret the vagueness of the law may be harmful to potential
LLC creation. The two differing opinions by the courts on the requirements necessary to meet
66 Id. at 4
67 Robinson v. Smith, 3 Paige Ch. 222 (N.Y. 1832)
68 Id at 6
69 In re Tzolis, 884 N.E.2d (opinion of Smith. J.).

Wagner 21
the dissolution standards, the two prong test adopted in 1545 Ocean and the broad interpretation
of the test as discussed in the same case in the concurring opinion by Judge Fisher, could allow
future courts to expand on each of the conflicting views. The best alternative to using court
issued rulings to interpret the law is by the New York State Legislature taking action and
amending the sections of the LLC law as they relate to dissolution. The legislature would be
able to do so through collaboration with NYS LLC’s and lobbyist’s while holding meetings
between these respective groups and the Assembly and Senate Committees of Corporations,
Authorities and Commissions.70 In addition, the state would be able to examine neighboring
state laws regarding the handling of LLC’s and put together specific criteria which may warrant
dissolution. In addition, through the analysis of current case law this will be made easier for
them to establish requirements for dissolution by addressing similarities in the problems which
are frequently facing the many LLC designated organizations in New York State.
Ongoing conversations have been discussed which attempt to determine whether the
reach of § 702 should be expanded to give relief to members of an LLC faced with oppressive
and fraudulent behavior. In the case of Natanel v. Cohen in 2014, the Supreme Court in King’s
County noted the difficulty that a member who has petitioned for dissolution will likely face if
they don’t meet the standards under § 702.71
In re Fassa Corp., the issue was whether the actions of one member who allegedly
engaged in self-dealings by delaying construction on the LLC’s property due to a personal
interest he had in another property warranted dissolution.72 In this case, the two members
created the LLC with the purpose to “acquire a parcel of real property… improve it with a
70 New York State Senate, Committee of Corporations, Authorities and Commissions(2015-2016)
https://www.nysenate.gov/committees/corporations-authorities-and-commissions.
71 Natanel v. Cohen, 43 Misc.3d 1217(A) (Sup. Ct. Kings County 2014).
72 Fassa Corp., 31 Misc.3d 783 (Sup. Ct., Nassau County 2011).

Wagner 22
residence, and resell the property.” Luckily for the petitioning members, the LLC’s operating
agreement permitted dissolution on the condition that a 60-day notice of termination was given
to the other member. Although this case didn’t have to resort to § 702 of the LLC law, the court
following the concurring opinion of Judge Austin had stated that absent the operating agreement,
the court would have allowed dissolution.73 This dissolution would have been permitted due to
the self-dealing issue, the finances of the LLC and disagreement of the members regarding the
operations would have made it difficult for the LLC to continue to be financially feasible under
the present conditions.
Although courts may begin to take the dissenting opinion of Fisher from 1545 Ocean into
consideration, the main way to address the problems regarding dissolution is to look more to the
operating agreement provision under § 417 of the LLC law.
III. Operating Agreement of LLC
A. § 417 of LLC law relating to having Operating Agreement in NY
The importance of § 417 of the LLC primarily relates to the legislature stating that the
LLC “shall” have an operating agreement. Typically, the operating agreement will discuss a
multitude of issues including the LLC’s businesses relations, operating procedures and the
appropriate steps to be taken should certain events arise. Although, there is no guidance from the
legislature or Department of State on what specific content should be included in an operating
agreement written by the respective LLC. This lack of guidance leaves the content of an
operating agreement to be decided on by the members of the LLC. In addition, despite the
requirement of having an operating agreement, under NY law some LLC’s fail to create the
document and in the rare occasion they are created, the agreement is vague or silent on the issue
73 In re Fassa Corp., 31 Misc.3d. at 785.

Wagner 23
of dissolution of the LLC.74 In the many years since the LLC law was first established in NY,
there have been several gaps found in the LLC law 75 , including those laws regarding the
operating agreement, nor is there are true guidance from the Department of State on the issue.
i. Necessary components to be included in Operating Agreements including
dissolution guidelines
Under NY LLC law, § 701 (b) addresses the operating agreement guideline with regards to
dissolution as follows:76
(b) Unless otherwise provided in the operating agreement, the death, retirement,
resignation, expulsion, bankruptcy or dissolution of any member or the occurrence of any
other event that terminates the continued membership of any member shall not cause the
limited liability company to be dissolved or its affairs to be wound up, and upon the
occurrence of any such event, the limited liability company shall be continued without
dissolution, unless within one hundred eighty days following the occurrence of such
event, a majority in interest of all of the remaining members of the limited liability
company or, if there is more than one class or group of members, then by a majority in
interest of all the remaining members of each class or group of members, vote or agree in
writing to dissolve the limited liability company.
Although this section of the LLC law clearly states exactly how a company may dissolve without
dissolution guidelines in the operating agreement including explaining that the company shall not
dissolve under death or resignation. However, unlike in the BCL, it mentions nothing regarding
dissolution under finding issues regarding fraud or oppression by any members of the LLC,
including those holding a minority interest. The only way to properly dissolve is by a vote by
members holding a majority of the remaining interest in the LLC, leaving those minority
members who may wish to dissolve the LLC in a difficult position.
The absence of any true guidance by the legislature or Department of State to include
dissolution guidelines to protect the minority class members after recent decisions made by the
74 1545 Ocean, 72 A.D.3d at 121.
75 Miller, supra note 7, at 404.
76 NY Ltd. Liab. Co., § 701(b).

Wagner 24
court is a clear lack of responsibility. The legislature and Department of State should want to
promote the good dealings and easy formation/dissolution in some instances of companies in
New York State and want to protect potentially oppressed members. However, the lack of clarity
and review of operating agreements when an LLC is formed is one of the main problems noticed
when discussing dissolution cases presented before the courts.
B. Lack of clarity and lack of review by Department of State
i. Proper procedure to follow up on Operating Agreement requirement
Section 417 of the LLC law requires that members of an LLC adopt a written Operating
Agreement.77 The only true guidance given by the LLC law is that: “The Operating Agreement
may be entered into before, at the time of, or within 90 days after the filing of the Articles of
Organization.”78 The Department of State further explains the law further and the reasoning
behind the agreement so that it will establish the rights, powers, duties, liabilities and obligations
of the members between themselves and with respect to the LLC. However, although the
Department of State requires an LLC to have a written operating agreement, they also state it is
for internal use by the LLC and is not filed with the Department of State.79 The proper way to
address the issues of a LLC operating without an operating agreement and then in turn is faced
with problems on the topic of dissolution is to merely require that the operating agreement be
filed within 90 days of the formation of the LLC. Specifically, the operating agreement should be
required to at least have a section that addresses dissolution that either; a) refers the court to look
to the NY LLC statutes which address dissolution; or b) that outlines the LLC developed
dissolution standards for the courts to reference if presented for a petition for judicial dissolution.
77 N.Y. Ltd. Liab. Co., § 417.
78 N.Y. Ltd. Liab. Co., § 417(c).
79 Id.

Wagner 25
However, since amendments may be made to operating agreements, the LLC would be required
to re-file the operating agreement with any amendments so that there is no arguments between
members as to which operating agreement the LLC is operating under. This would then eliminate
the many discrepancies between members of a LLC in the case that they wish to dissolve the
company for a number of reasons and also gives them the responsibility to file any amended
versions of the operating agreement with the Department of State knowing it to be the most up to
date agreement.
Another reason a LLC would not create an operating agreement although required is that
the law does not state any consequences if the written document is not adopted. If there were
certain penalties, such as fines or even the denial of a LLC application if an operating agreement
is not adopted within 90 days, then most member-managed LLC’s would form the document
allowing for less difficulty down the road if problems arise, specifically problems which aren’t
addressed by the current LLC law. The Department of State could state on the paperwork that
must be filled out by the LLC, that an operating agreement should be made and give a sample
Operating Agreement as guidance.80 Although, it may be seem as a tedious and expensive
addition during the formation of an LLC, it would be seen as beneficial in the future, especially
if a problem arises which needs to be addressed based on the agreement.81 If New York were to
enact a requirement of an operating agreement to be filed with the Department of State they
would be the first to do so and could set a precedent which could benefit future companies and
attract some businesses to become LLC’s in NY. Although in order for all the above referenced
80 New York State Bar Association,Operating Agreement Sample (2016)
https://www.nysba.org/WorkArea/DownloadAsset.aspx?id=21867
81 Newman, Stuart B. and Silvey, Tyler. (Summer 2015) “Piercing the LLC Veil Under New York Law,” New York
State Bar Association, NY Business Law Journal: Vol. 19 No. 1, Page 11.

Wagner 26
changes to be made, the best approach would be for the legislature to rewrite the LLC law in
order to remedy all the current ambiguities and problems which have arose in the past 10 years.
IV. Rewritten versions of LLC Law to help remedy all current ambiguities/problems
A. Dissolution including “reasonably practicable” definition
Pursuant to § 702 relating to Judicial Dissolution under the New York Limited Liability
Company Law will read as follows and the following amendments shall be made:82
(1) On application by or for a member, the supreme court in the judicial district in which the
office of the limited liability company is located may decree dissolution of a limited
liability company whenever it is not reasonably practicable to carry on the business in
conformity with the articles of organization or operating agreement. A certified copy of
the order of dissolution shall be filed by the applicant with the Department of State within
thirty days of its issuance.
(a) “Not reasonably practicable” shall be defined as: not capable of being carried out in a
simple logical way and in a reasonable, feasible manner.83
(b) “Feasible” shall be defined as: possible to be done easily or conveniently.84
(c) When the above definitions have been met, the petitioning party shall have the burden to
show that both of these two required factors are present in the LLC relating to the
dissolution: “
(1) the management of the entity is unable or unwilling to reasonably permit or
promote the stated purposed purpose of the entity to be realized or achieved, and
(2) continuing the entity or company is financially unfeasible.
82 NY Ltd. Liab. Co., § 702.
83 1545 Ocean, 72 A.D.3d at 130-131.
84 Black’s Law Dictionary (2010).

Wagner 27
Although there are some problems that can be argued against this proposal, it’s long-term
benefits will clearly outweigh the difficulties LLC’s can potentially face in court. It may be
argued that this new standard will make the dissolution of an LLC without agreement of all
members easier, however, the burden falls on the petitioning member to show one of the above
hardships. If the managements of the entity is unable or unwilling to reasonably permit or
promote the purpose of the entity, then it would be in the LLC best interest to dissolve rather
than to potentially continue to lose money of other members. Some may argue that since most
LLC’s are formed with the intention of a long-term business plan this can deter an LLC from
having the long-term idea. However, under the current law companies must turn to the court to
interpret whether the facts in the current case match those standards adopted in Ocean 1545 or
the court could exercise to develop a new test and develop their own interpretation of “not
reasonably practicable”. This amended version of the LLC law, allows the courts to follow a
clear cut model and again relies on the petitioning member to prove both of the required factors
needed for dissolution. In addition, it would help promote the LLC to develop dissolution
standards to follow so that they are the ones who decide what should warrant dissolution so that
the burden will not fall on the court to make that interpretation on their behalf. Although many
companies may not want to dissolve, so perhaps over time the legislature can amend this law
further as certain cases arise to have an opt-out provision of the law which provides a simple way
for a member who is concerned with the operation of the LLC to be released from the business in
a peaceful manner so that if the other members wish to continue the operation of the
business, they can do as they see fit.

Wagner 28
B. Addition of NYS LLC dissolution law which includes a necessary component
that discusses proper procedure to petition for dissolution based on fraud,
illegality or oppression as permitted in closely-held corporations
Pursuant to New York State Limited Liability Company law § 702 regarding dissolution of
a LLC in New York State, the following amendment shall be made:85
(1) Any member of a LLC may petition for and be granted dissolution in cases which the LLC or
any of its members have been found guilty of have acted or aided in poor business or personal
practices which arise out of fraudulent, illegal or oppressive acts related to the LLC, and shall
trigger the release of said members from the LLC and the immediate dissolution of the entity as
stated in this section.
(2) Fraudulent, illegal or oppressive acts shall be defined as:
(a) Fraudulent shall be defined as: a concealment of the truth or false representation
through a statement or conduct that injures another who relies on it in acting86
(b) Illegal shall be defined as: an act that is not authorized by law 87
(c) Oppressive shall be defined a: the act or an instance of unjustly exercising authority
or power; or; an offense consisting in the abuse of discretionary authority or unfair
treatment of minority shareholders by those in control of the corporation.88
85 NY Ltd. Liab. Co., § 702.

Wagner 29
In this situation, one may argue that the addition of a dissolution standard to protect members
from certain instances arising out of fraud, illegality or oppressive acts, will open the door for an
increase in cases to be brought against current LLC’s. However, the BCL already addresses
these issues with relation to corporations and partnerships and as a business friendly state, if the
company is operating in a fraudulent or illegal manner, we should want to protect those
individuals who are being harmed by these actions. New York State LLC’s should be able to
have these added protections afforded to them so that members feel that when entering into an
LLC, there is an option for escape if any of the above issues arise. Now it is not the intention of
this amendment to promote dissolution and make it an “easier opt-out” provision but rather it
should be viewed as a protective statute and allows members to be held to a higher standard than
others since they are in positions of power and authority.
Despite the intention, the argument can still be made that this type of amendment could
pose a potential harm to companies. LLC’s are made with the goal of being a long term business
with the potential to grow and flourish as time goes on, despite good and bad times within the
company and overall business environment. With these bad times, some LLC’s majority
members may foresee this type of law as a potential problem with regards to the threat of
dissolution being used as a bargaining tool by a minority member. In addition, the minority
member may try to strong-arm the majority members in order squeeze their way into getting into
a higher position within the LLC. These strong-arm tactics and threats could put the LLC and the
fellow members in a difficult position and lead to more harm to the company. While these fears
and thoughts are plausible, the advantages of having a LLC law which provides a path for
minority members to dissolve the company outweighs potential disadvantages with the new
amendment. The new amendment still requires that the minority member has the burden to show

Wagner 30
cause for dissolution and while this is the case in any action, if the minority member has truly
being oppressed or witnessing illegal/fraudulent activity then by allowing them to bring this
action for dissolution of the LLC, it could save the company from its continuing failure/illegal
actions.
C. Requirement of a copy of the LLC operating agreement to be filed with
Department of State
Pursuant to § 417 of the Limited Liability Company Law, relating to the operating
agreement of a limited liability company in New York State the following amendment shall
be made:89
(d) The Operating Agreement, which shall be written and agreed upon within 90 days of the
formation of the LLC, must then be filed with the NY Department of State to be kept on file. If no
operating agreement is filed, regardless of its existence, within the 90-day period following the
formation of the LLC then the LLC will forfeit their certification of the LLC to do business under
New York laws and guidelines and must then resubmit all prior paperwork along with all
previous fees, unless granted the 30 day extension as permitted hereafter.
(1) If within the 90-day period following formation of the LLC, a fine of $500, shall be
imposed if no operating agreement is on file, unless permitted a 30-day extension by the
Department of State. If permitted the 30-day extension and at that time no operating
agreement is on file, the LLC will then forfeit their LLC certification.
With regards to the Operating Agreement which must, under the amended law, be filed
with the Department of State the state could provide certain provisions with regards to the
89 N.Y. Ltd. Liab. Co., § 417.

Wagner 31
content which must be part of the agreement. Due to the problems which may arise out of
dissolution, derivative claims and issues regarding disagreement amongst members, the three
main content areas would include: Dissolution Guidelines, Claims for Derivative Action and
Remedy for Deadlock Between Members. Although, the required content can be amended over
time to reflect the change in NY laws and business practices, these primary areas would help to
resolve many of the issues as seen by the courts in the foregoing cases.
V. Conclusion
In conclusion, it is quite clear that the New York State legislature and courts have
struggled to agree on the requirements necessary for judicial dissolution. Despite the several
cases in recent years and the court’s interpretation of the LLC law, the legislature has yet to
decide to or even attempt to take action in order to amend the current LLC laws discussing
dissolution. Some may continue to think that it is in the best interest of the legislature to remain
silent on the issue and allow the courts to determine their own interpretation of the law.
However, through allowing courts to interpret the law, it may lead to conflicting opinions to
grow and potentially lead to even more confusion in future years. Another option would be for
the legislature to evaluate past court decisions and through discussions in both houses, they can
come to a mutual agreement to further clarify the existing laws. The Appellate Division, Second
Department’s analysis of the LLC law as it relates to “not reasonably practicable” can serve as a
strong template to make the law clear and concise.
During these discussions, certain provisions could also be written to help members
wishing to dissolve but are unable to do so simply when facing issues of oppression, fraud and
illegality by other members. In this instance, the legislature could adopt language, which is

Wagner 32
currently written in the BCL to help closely held corporation and establish a new set of laws
which will allow an easier dissolution option for LLC’s if it is warranted.
Finally, most problems could be easily resolved with the requirement of having an
operating agreement being kept on file with the Department of State. Although this process will
take time to create a simple and effective method for reviewing and filing operating agreements,
several of the problems found in the courts would be easily resolved in subsequent years.
It is clear that action by the legislature has and will continue to be the best way to resolve
certain issues presented before the courts of New York State. In particular, the laws governing
LLC’s and specifically the LLC dissolution laws require the most attention especially given the
recent cases argued in the New York court system. Although it will take time and collaboration
by several different organizations, politicians, courts and government groups, the end result will
bring a positive and welcoming business environment, bringing a rise in the number LLC’s in
New York State and securing the laws governing them in the future.

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