Petition for Judicial dissolution and sale in lieu of partition of two LLCs and a Corporation in Maryland. Introduction

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1 23400 Michigan Avenue, Suite 101 Dearborn, MI Tel: 1-(866) (toll-free) Fax: 1-(734) Petition for Judicial dissolution and sale in lieu of partition of two LLCs and a Corporation in Maryland Introduction Plaintiff is a member of two LLCs in Maryland and a stockholder in a Maryland corporation. The first LLC owns two parcels of real property. The second LLC and the Corporation owns one parcel of real property each. Plaintiff s ex-wife is the only other member of the LLCs and stock holder in the corporation. Plaintiff wants to sell the properties and dissolve the LLCs/Corporation. Short Questions 1. Whether the Plaintiff can file a complaint for judicial dissolution as well as sale in lieu of partition of the two LLCs and the Corporation? 2. Whether a single complaint would suffice for the two LLCs and the Corporation? Short Answers 1. Yes, the Plaintiff can file a petition for judicial dissolution and sale in lieu of partition together. 2. No, because the procedure for dissolution with regards to a Corporation and an LLC are entirely different, two separate petitions would have to be filed. Discussion 1(A) A CORPORATION MAY BE DISSOLVED VOLUNTARILY OR INVOLUNTARILY AND AN APPLICATION FOR SALE IN LIEU OF PARTITION CAN BE FILED ALONG WITH THE DISSOLUTION APPLICATION. 1

2 A Corporation can be involuntarily dissolved by stockholders or creditors. Md. CORPORATIONS AND ASSOCIATIONS Code Ann enumerates the grounds for petition by stockholders or creditors for involuntary dissolution. Accordingly, stock holders with 25% voting power may petition a court of equity to dissolve the corporation if directors are so divided respecting the management of the corporation's affairs that the votes required for action by the board cannot be obtained; or the stockholders are so divided that directors cannot be elected. In addition, any stock holder with voting power may also petition the court for a dissolution if the stockholders are so divided that they have failed, for a period which includes at least two consecutive annual meeting dates, to elect successors to directors whose terms would have expired on the election and qualification of their successors; or if the acts of the directors or those in control of the corporation are illegal, oppressive, or fraudulent. Id. The situation described in (a) (1) is commonly referred to as deadlock. Renbaum v. Custom Holding, Inc., 386 Md. 28, 49 (Md. 2005). A deadlocked corporation was defined, prior to enactment of 79A, as one which, because of decision or indecision of the stockholders cannot perform its corporate powers. Id. The intent is apparent in the Maryland scheme to afford the corporate entity statutory protection from internal and nonsubstantive personal quarrels regarding the management of the business. Id. at 51. The standards are strict with regard to (a) (1) and in order to file a petition for involuntary dissolution, the Directors must be divided according to the standards prescribed or at least one of the other grounds must be present. According to Md. Corporations and Associations Code Ann , in an involuntary dissolution proceeding, the Court may appoint a receiver who takes charge of the assets of the Corporation. Id. The receiver will determine if the Corporation is to be actually dissolved. Id. The Court will make the final decision as to the dissolution. Id. The Court 2

3 directs the receiver to liquidate and distribute the assets of the Corporation upon passing an order of dissolution. Id (c) provides that the Court will direct the assets of the Corporation to be liquidated by the receiver upon entering the final order of dissolution. Id. The section does not prescribe for a requirement that the applicant for dissolution has to make a separate application for liquidation and distribution of assets. Furthermore, the section further provides in Sub-section (e) that the assets shall be distributed either in kind or as assets of a different nature. This again gives an idea that both the petitions can be filed together, whereby the petitioner can clearly specify his preference as to the distribution of assets after dissolution. Another option for dissolution is voluntary dissolution as prescribed below: Approval of voluntary dissolution -- No stock outstanding or subscribed for (a) In general. -- If there is no stock entitled to be voted on the dissolution either outstanding or subscribed for, the dissolution shall be approved as provided in this section. (b) Approval before organization meeting. -- If the action is taken before the organization meeting of the board of directors, the dissolution shall be approved by resolution of a majority of the incorporators. (c) Approval after organization meeting. -- If the action is taken after the organization meeting of the board of directors, the dissolution shall be approved by resolution of a majority of the entire board of directors. Md. Corporations and Associations Code Ann Approval of voluntary dissolution -- Stock outstanding or subscribed for (a) In general. -- If there is any stock entitled to be voted on the dissolution either outstanding or subscribed for, the dissolution shall be approved as provided in this section. (b) Directors' action. -- Except as provided in of this article, a majority of the entire board of directors of a corporation proposing to dissolve shall: (1) Adopt a resolution which declares that dissolution of the corporation is advisable; and (2) Direct that the proposed dissolution be submitted for consideration at either an annual or a special meeting of the stockholders. (c) Notice to stockholders. -- Notice which states that a 3

4 purpose of the meeting will be to act on the proposed dissolution shall be given by the corporation in the manner required by Title 2 of this article to each stockholder entitled to vote on the proposed dissolution. (d) Stockholder approval. -- The proposed dissolution shall be approved by the stockholders of the corporation by the affirmative vote of two-thirds of all the votes entitled to be cast on the matter. Md. Corporations and Associations Code Ann (B) AN LLC CAN BE VOLUNTARILY OR INVOLUNTARILY DISSOLVED AND AN APPLICATION FOR SALE IN LIEU OF PARTITION CAN BE FILED ALONG WITH THE DISSOLUTION APPLICATION. According to 4A-903 of Md. Corporations and Associations Code, the circuit court of the county in which the principal office of the LLC is located can allow judicial or voluntary dissolution upon application by or on behalf of a member, whenever it is not reasonably practicable to carry on the business in conformity with the articles of organization or the operating agreement. Therefore in the instant case the Plaintiff can file an application for dissolution to the Circuit Court of the County in which the principal office of the LLC is located. The winding up procedure after the dissolution as provided in Md. Corporations and Associations Code Ann. 4A-904 provides for a general and judicial winding up. The remaining members of the LLC may wind up the affairs of the LLC, unless otherwise provided in the articles of organization or the operating agreement. Also, the Circuit court, on cause shown after dissolution, may wind up the LLC upon application by any member. The assets of the LLC are to be distributed, as per the provisions of Md. Corporations and Associations Code Ann. 4A-906, to the creditors in satisfaction of the liabilities of the LLC. Then to the members in proportion to their respective capital interests, unless 4

5 otherwise provided by the operating agreement. This is done by adding and deducting the respective shares of profits and losses of the LLC, to and from the capital interest. The distribution of assets are done after the dissolution and winding up proceedings. The petitioner can include his petition for sale in lieu of partition along with the petition for judicial dissolution as his preference in the distribution of assets. Voluntary dissolution of an LLC is provided in 4A-902 as follows: 4A-902. Causes of dissolution; continuation (a) Causes of dissolution. -- A limited liability company is dissolved and shall commence the winding up of its affairs on the first to occur of the following: (1) At the time or on the happening of the events specified in the articles of organization or the operating agreement; (2) At the time specified by the unanimous consent of the members; (3) At the time of the entry of a decree of judicial dissolution under 4A-903 of this subtitle; or (4) Except as otherwise provided in the operating agreement or as provided in subsection (b) of this section, at the time the limited liability company has had no members for a period of 90 consecutive days. (b) Continuation after no remaining members. -- A limited liability company may not be dissolved or required to wind up its affairs if within 90 days after there are no remaining members of the limited liability company or within the period of time provided in the operating agreement: (1) The last remaining member's personal representative or successor agrees in writing to continue the limited liability company and to be admitted as a member or to appoint a designee as a member to be effective as of the time the last remaining member ceased to be a member; or (2) A member is admitted to the limited liability company in the manner set forth in the operating agreement to be effective as of the time the last remaining member ceased to be a member under a provision in the operating agreement that provides for the admission of a member after there are no remaining members. (c) Continuation by personal representative or successor. -- An operating agreement may provide that the last remaining member's personal representative or successor shall be obligated to agree in writing to continue the limited liability company and to be admitted as a member or to appoint a designee as a member to be effective as of the time the last remaining member ceased to be a member. 5

6 (d) Continuation after termination of membership. -- Except as otherwise provided in the operating agreement and subject to the provisions of subsection (b) of this section, the termination of a person's membership may not cause a limited liability company to be dissolved or to wind up its affairs and the limited liability company shall continue in existence following the termination of a person's membership. Md. Corporations and Associations Code Ann. 4A A SINGLE PETITION IS NOT SUFFICIENT FOR THE APPLICATION FOR JUDICIAL DISSOLUTION AND SALE IN LIEU OF PARTITION. As the procedure for dissolution of a Corporation and an LLC is entirely different, separate petitions are required for each of the LLCs and the Corporation. Moreover, all the statutory provisions on dissolution provides for application by only a single stockholder, member, director etc. The statute is silent as to conjoining petitions for different LLCs and Corporations. Conclusion The petitioner can file the petition for sale in lieu of partition along with the petition for judicial dissolution. However, the Petitioner will be required to file separate petitions with regard to each of the LLCs and the Corporation because the procedural formalities for dissolution of an LLC and a Corporation are different. The petitions for sale and dissolution can be conjoined as the statute does not prescribe these as separate proceedings and both form part of the same transaction. Sale in lieu of partition i.e., distribution of assets is a natural consequence of a dissolution. 6