The last time we featured a notable decision on a claim for dissolution of a restaurant-operating LLC was in 2017, with a post by Frank McRoberts titled, “LLC’s Purpose Being Achieved? Business Doing Fine? Good Luck Getting Judicial Dissolution.” The title summarizes the takeaway: If the LLC is achieving its contractually-stated purpose and remains a financially viable operation, the odds of success on a contested dissolution claim are low.
In the years since that post, I’ve related that message to clients, courts, and colleagues. The relatively high standard for judicial dissolution of an LLC (here is a primer on the “unable or unwilling to promote the stated purpose” standard of 1545 Ocean Avenue), combined with the fact that many operating agreements contain a broad “purpose clause,” combined with the potential for a bad faith defense (discussed here) has produced a considerable number of cases where a minority owner’s bid to dissolve a financially viable LLC is rejected.
That background makes this week’s case all the more interesting. A New York LLC with a broad, “purposeless” purpose clause and demonstrated financial sustainability is dissolved over . . . the minority owner’s disagreement with the menu? You can’t be wok-ing serious.
Tangy Noodle LLC and the Purposeless Purpose Clause.
Chef Lieh Tang is the son of legendary Chinatown Chef Shorty Tang, who is widely credited with introducing cold sesame noodles to the U.S. In 2022, Chef Tang went into business with Orchard Hospitality Group with the aim of returning his father’s legacy to the New York culinary scene.
Tang and Orchard formed Tangy Noodle LLC, which quickly opened two New York City storefronts and formed plans for nationwide expansion. Through his wholly-owned company, Chef Tang LLC, Tang and Orchard entered into an operating agreement for Tangy Noodle LLC.
Tangy Noodle’s operating agreement contained a broad purpose clause:
The purpose of the Company is to: (i) engage in any lawful act or activity for which limited liability companies may be organized under the Act; and (ii) do all things necessary, suitable or proper for the accomplishment of, or in the furtherance of the Company’s business.”
This is exactly the kind of broad clause that ordinarily might make a dissolution application dead on arrival. Here, here, and here are examples of cases dealing first-round knockouts to dissolution petitions for failure to allege facts establishing that the LLC could not meet its exceedingly broad stated purpose.
Chef Tang’s Goodwill and Know-How.
Later in the operating agreement—seemingly miles away from the purpose clause—sits a provision about Chef Tang personally. Titled, “Acknowledgements and Assurance,” Section A-5.1 of the Operating Agreement states that:
Although the Member on this agreement is Chef Tang LLC, the parties’ cooperation and all arrangements under this Agreement are heavily relied on, and contingent upon, Tang’s expertise, skills, experience, knowledge, know-how, goodwill, and the like both as a renowned chef and in the restaurant business operation.”
The provision goes on to require that Tang, individually, maintain at least 70% ownership of Chef Tang LLC. The operating agreement also spells out responsibilities for Tang personally. Tang was required to “develop the general Menus,” document his recipes “both in writing and video recording,” and provide training to the kitchen staff. And while Orchard was required to contribute the costs and expenses to get the restaurants open and profitable, Tang was required to contribute his “goodwill, professionally and personally, in the local community and restaurant industry.”
From my outside perspective, the context of these provisions seems straightforward. The members envisioned that Tangy Noodle’s success would hinge largely on the reputation and knowledge base of Tang, and Orchard therefore insisted upon specific provisions of the agreement requiring the input of Chef Tang himself, not just his LLC. Orchard was going into business (and taking on potentially huge financial commitments) based on Tang’s legacy and skill; these provisions ensured that Tang brought both to the table.
Chef Tang and Orchard Disagree Over the Menu, Sparking Dissolution Petition.
According to Chef Tang, shortly after commencing operations at Tangy Noodle, Orchard began to make “substantial menu alterations.” His papers do not explain how Orchard modified the menu, only that “Orchard [ ] blatantly ignored Chef Tang LLC’s and my guidance and made substantial menu alterations, thereby breaching the terms outlined in the Operating Agreement.” Chef Tang also accused Orchard of failing to fulfill its obligations as Tangy Noodle’s tax matters partner.
Chef Tang’s bid for dissolution boiled down to a simple argument: because of Orchard’s failure to adhere to his instructions regarding the menu, he wanted out. Due to a “demonstrated [ ] lack of respect for my work,” Tang explained, “I no longer have trust in Orchard Hospitality and desire to disassociate myself and my company Chef Tang LLC, from Tangy Noodle.”
Tang also sought a preliminary injunction enjoining Tangy Noodle from taking any action unrelated to the winding up of Tangy Noodle LLC. Tang’s preliminary injunction request focused heavily on his allegation that Tangy Noodle was profiting from his name and family story. Tang wrote, “it is an insult to my and my father’s history to allow Orchard [ ] and Tangy Noddle [sic] to continue to use our reputations in the New York restaurant industry without my approval.”
Orchard moved to dismiss Tang’s dissolution petition and opposed the request for a preliminary injunction.
No Goodwill, No LLC.
By decision and order dated March 6, 2024, New York County Justice Lyle E. Frank granted dissolution of Tangy Noodle. While acknowledging that dissolution is a “drastic remedy,” the Court found that Chef Tang met its burden of “demonstrating that the purpose the business is no longer practicable.”
With no mention of the purposeless purpose clause, the Court found that “the crucial provision of the operating agreement” is that the operation of the business is “contingent upon . . . the goodwill” of Chef Tang. Moreover, found the Court, “such goodwill clearly no longer exists.” Why? Because, according to the Court, “Chef Tang has disagreed with certain menu items that have been set forth, among other things.”
As to Tang’s request for an injunction, the Court held that “there is irreparable harm that would occur without injunctive relief, as the likeness of Chef Tang would be used in an unauthorized way that could very well impact his reputation, and apparently is currently being done.” Based on that finding, the Court issued an injunction barring Tangy Noodle from taking any action inconsistent with its dissolution and winddown.
(Dim) Sum Questions.
What about the purpose clause? Surely a disagreement about the menu does not prevent Tangy Noodle from “engag[ing] in any lawful act . . . ” Why the focus on Tang’s goodwill? Yes, the operating agreement requires Tang to contribute his goodwill to the LLC, but how does a dispute about the menu change that requirement?
More generally, I can’t find a provision in the operating agreement requiring Tangy Noodle to get Tang’s approval on the menu (as opposed to the provision requiring that Tang offer his guidance on the menu). To the contrary, Orchard is the sole manager of the LLC, and with that comes authority to oversee operations.
What about the injunction? If Tang’s goodwill “clearly no longer exists,” then why is an injunction necessary to protect it? And why would Tangy Noodle’s use of Tang’s likeness be “unauthorized”? That’s exactly what the operating agreement calls for.
While I was not privy to all of the argument before the Court, I think all those questions make it hard to square this case with the others, both at the trial and appellate level, finding that general disagreement and distrust between co-owners does not pass the high bar for judicial dissolution of an LLC (e.g., here, here, here, here, and here). It’s also hard to shake the feeling (again, from my perch as an outsider) that Tang got what he bargained for. In exchange for Orchard’s financial contributions—including agreeing to advance all expenses until the restaurants were profitable—Tang lent his name, goodwill, and expertise, to a venture in which he would be a minority owner without complete control. Caveat venditor.
An Appeal Worth Watching.
Orchard sought a stay of the dissolution order and injunction pending its appeal. The Appellate Division, First Department, granted Orchard’s request for a temporary restraining order enjoining enforcement of the injunction, and it expedited Orchard’s stay application.
Whatever the outcome of the stay request, this appeal is worth watching. In my view, an affirmance would significantly lower the bar for judicial dissolution of a New York LLC.
Arbitration vs. Court.
While not mentioned by the parties or the Court, this case also offers a prime example of an often-difficult strategic question that arises early in cases. Tangy Noodle’s operating agreement contained a broad arbitration clause that likely should have steered this dispute into binding arbitration. I can only assume that neither party invoked the clause because both parties felt that their odds in the courtroom were better.
It’s easy to second guess that decision after the fact. It’s more important that the decision to proceed in arbitration or court be made with full knowledge of the risks and benefits of each.
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