Scrivener’s Error Keeps Sailboat-Owning LLC Afloat | Chicago Popular


In 2014, Avram Ludwig, Will Sahlman and Doug Liman, three friends who shared a love of sailing, decided to purchase Night hat. To do so, they formed Bull-Poet, a New York LLC, with each of the friends owning a third-party ownership interest in the LLC. With equal contributions from each, Bull-Poet bought Night hat.

Bull-Poet Operating Agreement

After Bull-Poet’s formation, members entered a mostly standard Operating Agreement. Appoints Sahlman as Manager, responsible for the day-to-day affairs of the Company, and establishes modest record keeping requirements. The Operating Agreement requires Bull-Poet to maintain: (i) an up-to-date list of members, (ii) the LLC’s Certificate of Incorporation and Operating Agreement, (iii) LLC tax returns, “if any, for the most recent three (3) years” and (iv) “any budget for the most recent three (3) years”.

The art. VII of the Operating Agreement allows the voluntary withdrawal of a member with six months’ notice to the remaining members, and provides that the withdrawing member has no right to the liquidation of his stake until the dissolution of the LLC; until that moment the withdrawing shareholder becomes the holder of economic interests.

The operating agreement also covers the dissolution of Bull-Poet. Article VIII provides:

1. The Company dissolves and dissolves upon the first occurrence of the following events:

a. The written consent of the majority of the interested Members;

b. The retirement, expulsion, death, bankruptcy or insanity of a Member;

c. The sale of all or substantially all of the business; or

d. Judicial decree of dissolution.

2. The events referred to in article 7, paragraph 1, do not involve the dissolution, dissolution and termination of the Company unless, within ninety (90) days of the occurrence of an event, the majority in Capital Interests of the remaining Shareholders decides to cease the activity of the Company.

Have you identified the potential error? Paragraph 2 of the art VIII provides that the events referred to in “art 7 paragraph 1” do not lead to the dissolution of the Company. But with regard to the events referred to in art VIII, Section 1? If section 2 applies only to “Article 7” (which refers to voluntary withdrawal), the dissolution of Bull Poet is necessary in the event of one of the events referred to in Article VIII, Section 1, such as the death of a member.

Ludwig’s successor attempts to strand the bull-poet

From 2014 to 2019, Bull-Poet saw little activity. He owned Night hat, which the members used recreationally, often sailing together. Bull-Poet’s only income was transfers from members and his expenses were incidental to the property of Night hat.

Upon Ludwig’s death in March 2019, his Bull-Poet membership passed to his sister Antonia. When provided with copies of Bull-Poet’s financial statements demonstrating de minimis activity, Antonia suit started, citing the record keeping requirements set out in the operating agreement. Among other allegations, Antonia alleged that the remaining Bull-Poet members breached their fiduciary duty to the Company by failing to get Bull-Poet to file tax returns and maintain sufficient records. You also requested the dissolution of the Company pursuant to Article VIII of the Operating Agreement and an accounting of Bull-Poet’s income and expenses.

Bull-Poet and the remaining members (collectively, “Defendants”), moved to reject Antonia’s actionand they pulled no punches in accusing Antonia of a money grab, trying to “talk [her inherited stake in Bull-Poet] in an exorbitant fee for herself, from the pockets of the two surviving members.

Writer’s mistake

Antonia hinged her dissolution request on Article VIII, Section 1(b) of the Operating Agreement, which requires Bull-Poet to be dissolved upon the death of a member. In its terms, the limitation on dissolution in Article VIII, paragraph 2, Antonia argued, applied to the events of voluntary termination under “Article 7 paragraph 1”, but not to the events applicant dissolution referred to in Article VIII.

The defendants, supported by a powerful litigation team at Paul, Weiss, responded with a two-pronged argument: First, they argued that the dissolution of Bull-Poet was improper because Antonia could not meet the requirements of LLC Law 702 and Issue of 1545 Ocean Ave., LLC72 AD3d 121, 131 (2d Dept 2010) (discussed here) that it is not reasonably practicable to carry on the business of the LLC. Second, Defendants argued that “the only logical reading of Article VIII, Section 2, is that it is intended to carve out an exception to the directly preceding section — Article VIII, Section 1 — and that the reference to the “Article 7 paragraph 1” is simply a scribe’s mistake.

In particular, the “only logical reading” offered by the defendants is not very logical. It does not make sense that the requirement of Article VIII, Section 2 for the consent of the members to the dissolution applies to the dissolution under Article VIII, Section 1(a) (consent of the members), 1(c) (sale of the business ), or 1(d) ) (judicial decree of dissolution).

Although the courts have the equitable power to correct “an error solely in reducing an agreement to writing” (Stang LLC v Hudson Sq. Hotel, LLC2017 New York Slip Op. 31243[U]15 [N.Y. Sup Ct, New York County 2017]), a unilateral error by one party “is not sufficient to rewrite an agreement that is complete in appearance” (Resort Sports Network Inc. v. PH Ventures IIILLC, 67 AD3d 132, 136 [1st Dept 2009]). While simple to articulate, these principles sometimes require difficult judgment calls in circumstances like this, where none of the proposed interpretations are perfect.

Judge Lebovits sided with the defendants, concluding that the limitation on winding up in Article VIII, section 2 applied to winding-up events under Article VIII, section 1 and not “Article 7”. The Court noted:

[T]there would be no reason here for an exception to the provisions of Article VII, § 1, to be placed in Article VIII, rather than in Article VII. Article VIII, § 2 also refers to the events triggering the dissolution, plural. Article VIII, § 1 has multiple possible trigger events; Article VII, § 1, only one.

Furthermore, it would be strange to read Article VIII, § 2, as creating an exception to Article VII, § 1. That is, Article VIII, § 2, is worded as limiting the effect of the provision of the agreement to which it applies – it is specified that the events in question “do not involve the dissolution, liquidation and termination of the company unless” the majority of the remaining shareholders decide to dissolve the company. But Article VII, according to its terms, does not require the dissolution / dissolution of the LLC in the event of a member’s withdrawal. There would therefore be no reason for Article VIII, § 2 to be worded restrictively if it were linked to Article VII, as the plaintiff’s position requires.

The Court was, however, rightly skeptical of Defendants’ argument that a member seeking dissolution under the operating arrangement must also satisfy the 1545 Ocean Ave standard: “It is not entirely clear to the court whether the plaintiff must (as suggested by the defendants) meet the requirements of LLC Act § 702 to obtain dissolution, if dissolution is otherwise required under the terms of the LLC operating agreement; and the authority provided by the defendants does not directly address that issue.

But what about fair accounting?

Perhaps the most interesting part of the The decision of the court it is his denial of Antonia’s claim to an account based solely on the Defendants’ unsworn claims that there are no profits to account for. The Court reasoned:

Plaintiff has not advanced an adequate basis to believe that the financial information it received from the defendants is incomplete, such that Bull-Poet has earned income or profits not reflected in its brokerage statements which could be the appropriate subject of a accounting.

Implicit in the Court’s decision in this case is a welcome measure of practical restraint: there is simply no need for lengthy and expensive accounting when there is nothing to account for. Such moderation is consistent with cases such as First Equity Realty vs. The Harmony Group II2022 NY Slip Op 30674(U) (Sup Ct, New York County Mar. 3, 2022) (discussed here), who refuses to order an accounting as it would be a useless exercise.

But that line of cases stands in apparent tension with a separate line of cases arguing that a minority member’s right to an accounting is “absolute,” such as the relatively recent decision by the First Department In re Grgurev v Licul et al.203 AD3d 624 (1st Dept 2022) (a case also discussed here), which states that: “if a relationship of trust exists between the parties . . . there is an absolute right to an accounting.

Last March, I made the not-so-bold prediction that given the ubiquity of accounting claims in corporate divorce cases, the “practical limits” on a fair accounting claim would quickly be tested by subsequent cases. While Bull-Poet can prove the prediction to be true, it also means we haven’t seen the end of these uncertain waters.

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Written by Natalia Chi

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