The Mississippi Supreme Court, in a case of first impression, recently interpreted the phrase “not reasonably practicable to carry on the business in conformity with the certificate of formation or the limited liability company agreement,” when an LLC member asked for judicial dissolution of the LLC. Venture Sales, LLC v. Perkins, 86 So.3d 910, 914 (Miss. 2012).
Background. Walter Perkins, Gary Fordham, and David Thompson launched a real estate development venture in 2000. Perkins contributed land and cash to Venture Sales, LLC, and Fordham and Thompson acquired an adjoining parcel of land and contributed it and cash to the LLC. The LLC’s operating agreement stated its purpose as being “to initially acquire, develop and sale [sic] commercial and residential properties near Petal, Forrest County, Mississippi.” Id. at 912 (brackets in original). Fordham and Thompson were experienced in the mobile-home business, and Perkins, an assistant coach for the Cleveland Browns football team, testified that he relied on them to work on developing the property.
Unfortunately, ten years later the LLC’s property was undeveloped and virtually unchanged, and in 2010 Perkins brought suit for an order dissolving the LLC. Id. at 913.
Mississippi’s chancery court found at trial that, “based on the property’s history, the company’s inability to get the required funding for development, and the uncertainty regarding the economic climate in the area, it was not reasonably practicable to carry on the business of Venture Sale,” and ordered that the LLC be dissolved. Id.
Court’s Analysis. The chancery court relied on Mississippi’s LLC Act. The statute then in effect allowed the court, on request of a member, to decree dissolution of an LLC if “[i]t is not reasonably practicable to carry on the business in conformity with the certificate of formation or the limited liability company agreement.” Miss. Code Ann. § 79-29-802 (Rev. 2009). (Mississippi’s LLC Act was subsequently amended and judicial dissolution is now covered by Section 803, but the wording at issue in Venture Sales was essentially unchanged.)
No Mississippi case had interpreted the “not reasonably practicable to carry on the business” phrase, so the Supreme Court looked to decisions from other states. Many state LLC statutes use a similar standard and allow judicial dissolution if “it is not reasonably practicable to carry on the business in conformity with the certificate of formation or the limited liability company agreement,” or similar language. (Washington and Delaware, for example, have similar provisions in their LLC statutes. RCW 25.15.275; Del. Code Ann. tit. 6, § 18-802.) This language has been interpreted by courts from some of those states.
The court cited decisions from Delaware, New Jersey, New York, South Dakota, and Virginia, for several propositions: (i) dissolution under this standard does not require that an LLC’s purpose be completely frustrated; (ii) dissolution is appropriate when the LLC’s economic purpose is not being met, or when the company is failing financially; (iii) dissolution may be appropriate when an LLC is functioning simply as a residual, inertial status quo, even if it is financially stable and has assets exceeding its liabilities; (iv) dissolution is allowed if an LLC cannot effectively operate under the operating agreement to meet and achieve the purpose for which it was created; (v) dissolution is appropriate when an LLC is not meeting the economic purpose for which it was established; and (vi) in determining whether dissolution is appropriate, the court must first look to the LLC’s operating agreement to determine the purpose for which the company was formed. Venture Sales, 86 So.3d at 914-15.
Turning to Venture Sales’ purpose, which was to acquire, develop and sell the real estate, the court noted that the property remained completely undeveloped more than ten years after the company was formed. Fordham and Thompson gave a number of reasons for the delay: rezoning, Hurricane Katrina, new subdivision regulations passed by the City of Petal, and the 2007 national housing market decline. But during the same ten-year period, Fordham and Thompson had successfully formed two other LLCs and developed two other large subdivisions with 25 miles of the Venture Sales property. More significantly, Fordham and Thompson presented no evidence that Venture Sales would be able to develop the project within the foreseeable future, and Fordham admitted in his trial testimony that he couldn’t say when the company might be able to begin developing the land.
Fordham and Thompson argued that it was reasonably practicable for the LLC to continue operating because it was solvent and could hunker down and wait for the overall economy to improve. The court found, however, that merely being solvent was not an adequate reason to continue the LLC, given the lack of a plan to meet the LLC’s purpose. Id. at 915-16.
The court accordingly held that the chancellor’s order dissolving Venture Sales was supported by substantial evidence and was not an abuse of dissolution, and affirmed the order of dissolution. Because the chancery court’s order had not made provisions for winding up the LLC, the court remanded for the winding up of Venture Sales. Id. at 917.
Comment. The scope of the phrase “not reasonably practicable to carry on the business in conformity with the certificate of formation or the limited liability company agreement” is inherently open-ended, because it is not explicitly tethered to any particular fact pattern. A court faced with an LLC member’s request for dissolution must therefore examine in some detail the facts and circumstances of the LLC in question, and then set those against the LLC’s stated purpose.
Venture Sales shows an unusual fact pattern of long-term inactivity while the LLC held a valuable but undeveloped asset, in the face of an explicit purpose in the LLC agreement to develop the asset. The opinion thoughtfully analyzes the LLC’s history, purpose, prospects, and the trial testimony about the managers’ plans, and provides a good review of cases from other jurisdictions.
The case underscores the importance of the purpose clause in an LLC’s operating agreement. The result in Venture Sales was driven, in part, by the purpose: to acquire, develop, and sell the real estate. If the purpose had also included, for example, “and hold for appreciation,” the court probably would not have ordered dissolution.