It’s been 15 years since the Second Department’s decision in Matter of 1545 Ocean Avenue, LLC, 72 AD3d 121, 2010 NY Slip Op 00688 (2d Dept Jan. 26, 2010), which established the standard for judicial dissolution of limited liability companies. Under that standard, a New York LLC should be judicially dissolved when the management of the company is unable or unwilling to permit or promote the stated purpose of the entity, or continuing the entity is financially unfeasible.
That standard has proved both enduring and highly fact-specific, producing over the last decade and a half a landscape of judicial decisions finding that specific conduct and circumstances do—or do not—warrant dissolution.
I’ve also seen at least some disconnect between that standard and the real interests of many LLC members. On the one hand, the standard focuses on two things: (i) the stated purpose of the LLC as set forth in the operating agreement, and (ii) the financial feasibility of the LLC. On the other hand, in many cases, the “stated purpose” as set forth in the operating agreement is boilerplate that the owners never considered. And the financial feasibility of the LLC usually is a given; people tend not to litigate over failing businesses. Most owners who resort to judicial dissolution do so for other reasons.
Many LLC members seek judicial dissolution as a means to resolve distrust of or perceived misconduct by their co-owners. And while there is room for consideration of those things in the “unable or unwilling” language of the dissolution standard, a court faithfully applying the 1545 Ocean Avenue standard and a party seeking his day in court about allegations of member misconduct might feel like they’re speaking different languages.
A recent decision from New York County, Otsuka v Shimura, No. 159202/2020 (Sup Ct, New York County 2025), serves as a fine springboard to highlight that disconnect, discuss the timing of an LLC dissolution claim, and take stock of the current LLC dissolution landscape.
The Limited Purpose LLCs
In 2012, Otsuka and Shimura entered the real estate business together as equal partners. The two formed two LLCs, of which they were each 50% members: Green Apollo LLC and Cimba King LLC. Each LLC would purchase and operate a different property in New York’s Harlem neighborhood.
The operating agreements (Green Apollo’s here; Cimba King’s here) made Shimura the Manager of the LLCs, giving him broad rights to enter into contracts, sell or encumber the companies’ assets, and otherwise attend to their day-to-day operations.
Both operating agreements contain limited purpose clauses. Green Apollo’s states that its purpose is “solely to purchase, acquire, buy, sell, own, exchange, trade in, hold, improve, develop, lease, manage, operate, subdivide, and otherwise deal in and with the real property and improvements thereon located at 170 West 124th Street, New York, New York.” Cimba King’s has the same purpose, except for the property that it owns.
Otsuka’s Initial Claims
By 2020, the parties’ relationship had soured. Otsuka commenced suit against Shimura and the LLCs, in which she detailed—to the extent possible—her suspicions concerning Shimura’s mismanagement of the companies. According to her Complaint, Shimura had subjected the LLCs to lawsuits and regulatory exposure by allowing an illegal drinking and gambling establishment at the properties. Otsuka also alleged that Shimura failed to provide adequate disclosure of the companies’ financials, co-mingled funds between the companies, and—on information and belief—mortgaged the properties and misappropriated the companies’ funds for his own use.
Shimura insisted that Otsuka’s complaint blew things way out of proportion. The “illegal gambling establishment” was a poker game run by one of the property’s maintenance workers, which resulted in a total fine of $1,000. Allegations of “co-mingling,” Shimura insisted, were really Otsuka’s misunderstanding of an escrow account. And Shimura in his role as Manager of the companies was permitted to refinance the properties, which he did in the best interests of the companies.
The case spent the better part of two years with the parties sparring over the pleadings. Shimura moved to dismiss, and Otsuka cross-moved to amend. By December of 2022, the Court entered a thorough order disposing of many of Otsuka’s claims and substantially narrowing the case.
The Last-Minute Dissolution Claim
On March 1, 2024, a fire severely damaged the building owned by Green Apollo, leaving most of the building uninhabitable and in desperate need of repairs.
Following the fire, Otsuka sought to amend her complaint to add a cause of action for dissolution of the companies. In her proposed Third Amended Complaint, Otsuka sought dissolution of both Cimba King and Green Apollo under LLC Law 702.
Otsuka’s bases for dissolution were mostly complaints about Shimura’s withholding documents and alleged financial misconduct—the same misconduct that Shimura insisted was blown way out of proportion. Otsuka alleged:
- Shimura failed to provide financial reports;
- Shimura mismanaged the companies, including by allowing the gambling establishment and co-mingling funds;
- Shimura has at times disputed Otsuka’s 50% membership interest; and
- The fire at the Green Apollo building renders it no longer habitable.
Shimura argued that Otsuka’s dissolution claims were both too late and too little. He insisted that the Court should not excuse Otsuka’s four-year delay in seeking dissolution for the same “misconduct” that she originally sued over. And on the merits, Otsuka’s complaints amount to general difficulties faced by any real estate owning business in New York City (or, at most, claims for an accounting or money damages), not grounds sufficient for dissolution.
Neither Too Little, Nor Too Late, Holds the Court
New York County Justice Mary Rosado granted Otsuka’s request for leave to file her Third Amended Complaint. As to the timing, Justice Rosado was forgiving, finding that Otsuka’s delay was excusable by, among other things, her change in counsel and a failed mediation.
As to whether Otsuka’s allegations stated a claim for dissolution of Green Apollo and Cimba King, Justice Rosado started with the narrow purpose clauses of both entities’ operating agreements. Based on the LLCs’ stated purpose of owning specific real property, the Court found—at least at the pleading stage—that the proposed amended complaint is “replete with allegations that the managing member, Defendant, has failed to promote the purposes of these two LLCs and has allegedly allowed the two properties to deteriorate allegedly while operating a substantial loss over multiple years.”
And while the parties’ briefing focused heavily on whether the alleged misconduct of Shimura was sufficient to dissolve the LLCs, Justice Rosado focused on the core factors of the 1545 Ocean Avenue standard. Given the limited purpose clauses of the LLCs’ operating agreements, the uninhabitability of the Green Apollo building, and Otsuka’s allegations that the LLCs have operated at a loss for several years, Otsuka was able to state a claim for dissolution, even if her allegations concerning Shimura’s misconduct were thin.
The LLC Dissolution Landscape
The Court’s sustaining Otsuka’s dissolution claims reinforces the dual focus of the 1545 Ocean Avenue standard: stated purpose and financial feasibility.
It also offers another marker on the judicial roadmap for determining when facts and circumstances are sufficient to dissolve a limited liability company. Notable markers include:
- Disagreement about the menu or operations of a profitable restaurant with no operating agreement – insufficient (String & Brass);
- Refusal to produce books and records, discrete acts of financial malfeasance of a profitable real estate holding company – insufficient (Hoham 932 Grand Street LLC);
- Refusal to produce books and records, discrete acts of financial malfeasance of a profitable boxing gym with broad purpose clause – insufficient (Womens World of Boxing);
- Oppression and systematic exclusion of member from affairs of profitable company – insufficient (Icon LLC; 3 Covert LLC);
- A tax fraud indictment of 50% member and LLC – insufficient (F&B Car Service);
- Diverting the company’s revenues to another entity, effectively cutting out minority members – sufficient (Epic Gymnastics);
- Deadlock and bitter feuding between 50/50 co-managing members – historically Insufficient (Chamber House Partners), but trending toward sufficient (Hudson Valley NY Holdings LLC; Amici LLC).
Concluding Thoughts
The Court in Otsuka started its analysis with quotations from the narrow purpose clauses in the operating agreements of Green Apollo and Cimba King. Without those narrow clauses, I could easily see this case going the other way. 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. Don’t underestimate the significance of the purpose clause in the operating agreement.
A few weeks ago, Becky Baek highlighted a potential easing of the 1545 Ocean Avenue standard in the context of deadlocked, 50/50 real estate holding LLCs. Perhaps too early to tell, but the ultimate outcome in Otsuka may continue or buck that trend.
A Doniger election? The operating agreements of King Cimba and Green Apollo contain broad restrictions on transfers of membership interests, including transfers “by operation of law.” They also contain a mandatory buy-sell provision. A member who “involuntarily withdraws” triggers an option by the other member to purchase their interest. “Involuntary withdrawal,” in turn, has a broad definition including—arguably—commencement of a dissolution proceeding. The Doniger line of cases comes to mind. There’s an issue I’d like to see litigated in the LLC context.
[View source.]
