Opinion
INDEX NO. 151225/2015
09-01-2017
IN THE MATTER OF APPLICATION OF ANTHONY FELZEN, HOLDER OF TWELVE PERCENT OR MORE OF ALL OUTSTANDING MEMBERSHIP CERTIFICATES OF PEI MUSSEL KITCHEN, LLC D/B/A FLEX MUSSELS Petitioner, v. FOR THE DISSOLUTION OF PEI MUSSEL KITCHEN, LLC D/B/A FLEX MUSSELS, A NEW YORK LIMTED LIABILITY COMPANY, Respondent.
NYSCEF DOC. NO. 69 PRESENT: HON. DAVID BENJAMIN COHEN Justice MOTION DATE 9/26/2016 MOTION SEQ. NO. 004
DECISION AND ORDER
The following e-filed documents, listed by NYSCEF document number 50, 51, 52, 53, 54, 55, 56, 57, 58, 59, 60, 61, 62, 63, 64, 65, 68 were read on this application to/for Dismiss.
Upon the foregoing documents, it is
Respondent's motion to dismiss the cause of action seeking dissolution is granted and respondent's motion to dismiss for failure to join indispensable parties is granted to the extent of requiring petitioner to file an amended petition and add the necessary parties, and denied in all other respects. In the Amended Petition, Anthony Felzen ("petitioner") alleges that the Articles of the Original Operating Agreement, along with his individual rights, were violated by PEI Mussel Kitchen, LLC (the "Company" or "respondent"). Respondent, a limited liability company organized under the laws of the State of New York, granted petitioner a membership interest in the Company, in exchange for his investment in the Company. The Company and the relationship between the members were governed by an operating agreement dated April 17, 2010 (the "Original Operating Agreement"). Pursuant to the Original Operating Agreement, the membership interests of the members were: Robert Shapiro - 1%; Laura Shapiro - 50%; Alexandra Shapiro - 12% (all the Shapiro's collectively, the "Shapiro Owners"); Anthony Felzen - 12%; Michael Ashkenazy - 9%; Jonathan Krieger - 11.8%; and Ariel Shuster - 4.2%.
Article 11 of the Operating Agreement states:
"...Major [Company] decisions other than with respect to day to day operations shall be made by a majority in number of the Members holding 70% of the Percentage Interest until the Parties' Capital Contributions are returned and the Parties have received their 25% return on their Capital Contribution, after which such business shall be conducted by the Managing Members..."
"...the Managing Members shall not, without the prior written consent of the affirmative vote or consent of the Members holding 70 percent of the Percentage Interests, sell, exchange, lease, assign or otherwise transfer all or substantially all of the assets of the Company; borrow money on behalf of the Company other than debts incurred in the ordinary course of business or, except as otherwise provided hereby, create any reserves for repairs, replacements, improvements or any other purpose, in excess of an aggregate of $5,000. . . ."
Additionally, Article 11, paragraph 9 states that the Managing Members, for their services in arranging the transactions contemplated by the Company and their continued management of the Company, shall be entitled to the following fees and compensation pursuant to the following terms and conditions:
"[t]he management fee shall be 3% of Gross Cash Receipts from the Restaurant operations (excluding Capital Contributions). The Managing Members shall defer half of this fee until 50% of the [Felzen, Ashkenazy, Krieger] and Shapiro Capital Contribution has been returned. Once 50% of the Capital Contributions are repaid, the Management Fee shall be 3% of Gross Revenues/Cash Receipts from Restaurant operations payable to Managing Members. Once the investors have received 100% of their capital and the 25% return on their Capital Contribution, the deferred Management Fee shall be paid to the Managing Members. The Managing Members shall provide a monthly statement of Management Fees due and accrued."Article 13 of the Original Operating Agreement provides the following;
"...no Member or other person holding any interest in the Company may assign, pledge, hypothecate, transfer or otherwise dispose of all or any part of his/her
interest in the Company, including without limitation the capital, profits or distributions of the Company without the prior written consent of all the other Members in each instance.Article 20 of the Original Operating Agreement provides the following:
"An assignment, pledge, hypothecation, transfer or other disposition of all or any part of the interest of a Member in the Company or other person holding any interest in the Company in violation of the provisions hereof shall be null and void for all purpose.
"This Agreement may not be altered, amended, changed, supplemented, waived or modified in any respect or particular unless the same shall be in writing and agreed to by the affirmative vote or consent of the Members holding 70% of the Percentage Interests. No amendment may be made to Article 6, 8, 13, 17 hereof, insofar as said Articles apply to the financial interests of the Members, except by the vote or consent of all of the Members. No amendment of any provision of this Agreement relating to the voting requirements of the Members on any specific subject shall be made without the affirmative vote or consent of at least the number or percentage of Members required to vote on such subject."
In addition to his initial investment of $100,000, petitioner contributed an additional $29,402.00 to the Company to support its operations. The Amended Petition alleges that as of September 9th, 2016, petitioner received a total of $51,755.00 in distributions, less than forty percent of his total capital contribution of $129,402.00.
Sometime in 2010, Robert Shapiro and Ariel Shuster entered into an agreement whereupon Shapiro purchased Shuster's membership interest. On November 26, 2013, Robert Shapiro did the same with Ashkenazy and Krieger's membership interests. On June 26, 2014, following the membership interest purchase from Ashkenazy, Krieger, and Shuster, the Shapiro Owners entered into an Amended and Restated Limited Liability Company Agreement (the "Amended LLC Agreement"). The Amended LLC agreement contained several significant changes to the rights of petitioner and the managing members.
The Amended Petition alleges that Robert Shapiro purchased the membership interests of Ashkenazy, Krieger, and Shuster without all the other Members' consent, in direct violation of Article 13 of the Original Operating Agreement. Further, the Amended Petition alleges that Robert Shapiro improperly used Company funds to pay for those membership rights. Additionally, the Original Operating Agreement states in Article 20 that no change may be made that would affect the voting rights without petitioner's express consent.
The Amended Petition further alleges that the Amended LLC Agreement dated June 26, 2016 was improper as well. Pursuant to Article 11 of the Original Operating Agreement, major Company decisions required the vote of the Members holding seventy percent of the membership interests until such time as all the Members would receive distributions totaling their initial investment, plus a twenty-five percent return. Here, combining the collective memberships of the Shapiro Owners, they only had 63%. The only way the Shapiro Owners could exceed the 70% threshold was through the purchases that were allegedly improper. Additionally, to the extent that the Amended LLC Agreement eliminated these requirements, Article 20 specifically required that "[n]o amendment may be made to Article 6, 8, 13, 17 hereof, insofar as said Articles apply to the financial interests of the Members, except by the vote or consent of all of the Members. No amendment of any provision of this Agreement relating to the voting requirements of the Members on any specific subject shall be made without the affirmative vote or consent of at least the number or percentage of Members required to vote on such subject." Article 13 discusses assignments or sales of interest. Thus, sales and changes to voting requirements could not be made without the purchase by Shapiro being proper.
Finally, petitioner claims that for at least the past two years, and perhaps since the Company's inception, the Shapiro Owners have misused Company funds to pay their personal expenses, salaries, management fees and royalties. As a result of the alleged misappropriation, the Company has underperformed financially and failed to realize its growth opportunities. Additionally, the Amended Petition alleges that respondent failed to provide petitioner with adequate information to determine what amounts were paid to the various individual Shapiros in the form of salary, management fees, distributions, license fees and reimbursements for personal expenses, in violation of Article 11 of the Original Operating Agreement.
The Amended Petition seeks; (1) dissolution of the Company pursuant to Section 702 of the New York Limited Liability Law, (2) an order declaring the transfers of membership interests pursuant to the Ashkenazy, Krieger, and Shuster purchase null and void, (3) an order reallocating the economic interests of the withdrawn members (Ashkenazy, Krieger, and Shuster) to the remaining Members, (4) an order enjoining the Shapiro Owners, directly or indirectly, from (i) using company funds to pay personal expenses, (ii) receiving salaries from the Company, and (iii) paying themselves management fees that exceed the amounts permitted in the Original Operating Agreement, (5) an order for accounting of the Company POS system, bank and credit card accounts, and books and records, at the Company's cost and expense, from the date of formation of the Company through the date of such order, (6) an order granting full review of all accounts (bank and credit card) held in the names of the Shapiro Owners and their affiliated businesses, at the Company's cost and expense, (7) an order demanding (i) the return to the Company of all amounts improperly paid to the Shapiro Owners in management fees, license fees, salaries and personal expense reimbursements, (ii) recoupment of monies paid by the Company for goods and services rendered to third parties, (iii) recalculation of Company profits, and (iv) distribution to petitioner of his pro rata share of the Company's recalculated profits, (8) appointment of a temporary receiver to monitor the financial activities of the Company until or after dissolution is decreed, (9) equitable relief to enforce Petitioner's contractual rights under the Original Operating Agreement and (10) declaratory relief invalidating the Amended LLC Agreement.
Respondent moved to dismiss the Amended Petition for dissolution pursuant to CPLR § 1001(a), §1001(b), §1003, CPLR § 3211(a)(7) and (10). When deciding a motion to dismiss pursuant to CPLR § 3211, the Court should give the pleading a "liberal construction, accept the facts alleged in the petition to be true and afford the petitioner the benefit of every possible favorable inference" (Landon v Kroll Laboratory Specialists, Inc., 22 NY3d 1, 5-6 [2013]; Faison v Lewis, 25 NY3d 220 [2015]). Respondent moved to dismiss based upon failure to state a claim upon which relief can be granted and failure to name indispensable parties.
Under CPLR § 3211(a)(7), the Court "accepts as true the facts as alleged in the petition and affidavits in opposition to the motion, accords the petitioner the benefit of every possible favorable inference, and determines only whether the facts as alleged manifest any cognizable legal theory" (Elmaliach v Bank of China Ltd., 110 A.D.3d 192, 199 (1st Dept 2013) (quoting Sokoloff v Harriman Estates Dev. Corp., 96 N.Y.2d 409, 414 [2001])).
The motion to dismiss for dissolution is granted. A request for judicial dissolution of an LLC is made pursuant to New York Limited Liability Company Law § 702, which provides that:
"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."
Further, judicial dissolution is appropriate when the petitioning member establishes "in context of the terms of the operating agreement or articles of incorporation, that (1) the management of the entity is unable or unwilling to reasonably permit or promote the stated purpose of the entity to be realized or achieved, or (2) continuing the entity is financially unfeasible" (Matter of 1545 Ocean Ave., LLC, 72 AD3d 121 [2nd Dept 2010]; see also Barone v Sowers, 128 AD3d 484 [1st Dept 2015]; Doyle v Icon, LLC, 103 AD3d 440 [1st Dept 2013]). Here, the stated purpose and business of the Company was to "develop and operate a restaurant (the "restaurant") and any possible future restaurants with a, included but not limited to, mussels and seafood theme and to enter into and perform contracts and agreements of any kind necessary to, [] the business of the Company; and to carry on any other activities necessary to [the foregoing]...."
Petitioner is not entitled to dissolution, pursuant to §702, as the stated purpose and business of the LLC was to "develop and operate" restaurants, and the allegations in the Amended Petition do not show that the Company is "unable or unwilling to reasonably permit or promote the stated purpose of the entity to be realized or achieved, or [that] continuing the entity is financially unfeasible" (see Barone v Sowers, 128 AD3d at 485). The petition does not make any allegations that reflect that the purpose of the Company is not or cannot be realized or achieved. As such, respondent's motion to dismiss the dissolution cause of action for failure to state a claim is granted.
The motion to dismiss for accounting is denied. The Original Operating Agreement, which the Amended Petition alleges should still be in effect, clearly obligated the managing members to open the books and provide certain financial information, which according to the Amended Petition has not been provided. Further, in East Quogue Jet, LLC, the Court held, that an individual member of an LLC had a right to demand an accounting (East Quogue Jet, LLC v East Quogue Members, LLC, 50 AD3d 1089 [2d Dept 2008]). Additionally, members of a "limited liability company may seek an equitable accounting under common law" (Gottlieb v Northriver Trading Co. LLC, 58 AD3d 550, 551 [1st Dept 2009]). Therefore, petitioner is entitled to an accounting of the Company's records.
Under CPLR § 3211(a)(10), a motion to dismiss may be made on the ground that "the Court should not proceed in the absence of a person who should be a party." The Court's first task with a §3211(a)(10) motion is to ascertain whether an individual is a necessary party within the meaning of CPLR § 1001(a). Under CPLR § 1001(a), a necessary party is one whose non-joinder will jeopardize the outcome of the action in either of two ways: (1) complete relief cannot be accorded the existing parties to the action; or (2) the absentee may be inequitably affected by the judgment. Pursuant to CPLR § 1003, non-joinder of a party who should be joined under § 1001 is grounds for dismissal of an action without prejudice unless the Court allows the action to proceed without that party under the provisions of that section.
Under CPLR 1001(b), when a necessary party "has not been made a party and is subject to the jurisdiction of the Court, the Court shall order him summoned. If jurisdiction over him can be obtained only by his consent or appearance, the Court, when justice requires, may allow the action to proceed without his being made a party. In determining whether to allow the action to proceed, the Court shall consider:
"1. whether the plaintiff has another effective remedy in case the action is dismissed on account of the nonjoinder;
2. the prejudice which may accrue from the nonjoinder to the defendant or to the person not joined;
3. whether and by whom prejudice might have been avoided or may in the future be avoided;
4. the feasibility of a protective provision by order of the Court or in the judgment; and
5. whether an effective judgment may be rendered in the absence of the person who is not joined."
(id.; see also Matter of Red Hook/Gowanus Chamber of Commerce v New York City Bd. of Stds. & Appeals, 5 NY3d 452, 457 [2005]).
While CPLR § 1001(b) protects the "absent party who might be inequitably affected by a judgment in the action, it also treats dismissal for failure to join a necessary party as a last resort" (Red Hook/Gowanus Chamber of Commerce, 5 NY3d at 459; see generally Siegel, NY Prac. § 133, at 227 [4th ed]). Thus, pursuant to CPLR § 1001(b), a court has the "discretion to allow a case to continue in the absence of a party, as justice requires" (id.).
This Court finds this matter would severely impact the interests, rights and duties of Ashkenazy, Krieger, Shuster and the Shapiro Owners and that without joining said parties, complete relief cannot be accorded. As such, the motion to dismiss based upon lack of necessary parties is granted to the extent requiring petitioner to file an Amended Petition adding the necessary parties. Accordingly, it is therefore
ORDERED, that respondent's motion to dismiss the first cause of action in the Amended Petition for dissolution is granted; and it is further
ORDERED, that respondent's motion to dismiss based upon the lack of joinder of necessary parties is granted to the extent requiring petitioner to file an Amended Petition adding the necessary parties of Ashkenazy, Krieger and Shuster, service to be effectuated on or before November 22, 2017 and petitioner to request a preliminary conference within 15 days of completion of service; and it is further
ORDERED, that the remainder of respondent's motion is denied.
This constitutes the decision and order of the Court. 9/1/2017
DATE
/s/ _________
DAVID BENJAMIN COHEN, J.S.C.