Dissolving an LLC and Partitioning Property: The High Bar for Getting Results
Adam Leitman Bailey and Courtney J. Lerias explain why members of real estate-holding LLCs face major obstacles to judicial dissolution and partitioning property.
This article will discuss the issues that arise when a limited liability company (“LLC”) operates for the purpose of owning real property, but where the LLC’s members have persistent disputes among themselves, regarding the operation of the LLC, and where one or another of the disputing members wants “out” of its LLC membership, because it sees no other way of resolving what has become an intractable conflict.
A member of a limited liability company formed to own real estate may discover that ending that business relationship and selling the LLC’s real property is more difficult than anticipated.
This article recommends ways in which operating agreement provisions may be drafted to protect members when such disputes arise and proposes statutory reforms to provide a more practical means of member departure from an LLC.
The Problem that Needs Fixing
Even when persistent disputes have destroyed the members’ ability to work together, especially where one of two co-equal members is systematically blocked from (a) participating in decision making, (b) making rent collection, and/or (c) sharing in even minimal profit revenue, this situation may nevertheless support a court’s prohibiting the dissolution of the LLC because the LLC is still capable of fulfilling its stated business purpose.
In such cases, where there is no previously specified “exit” plan provided for in the LLC operating agreement, a frustrated and disenfranchised LLC member remains left with an interest in a viable business, but with no practical means of separating itself from the other owners.
Instead of continuing to effectively mandate such hopeless situations, New York law should provide a remedy that facilitates the marginalized LLC member’s swift and efficient exit from its predicament.
Partition Is Not an Option
Under Article 9 of the Real Property Actions and Proceedings Law (“RPAPL”), New York provides joint tenants and tenants in common with means to resolve such disputes—partition. RPAPL §901(1).
However, LLC Members cannot seek partition. when an LLC holds title to the property. LLC members cannot seek partition merely by virtue of their membership interests. Unlike individuals who directly own real property, LLC members hold interests in the LLC, not in the property itself.
An LLC membership interest constitutes personal property, and members have no ownership interest in specific property belonging to the LLC. Limited Liability Company Law §601. This distinction has significant consequences for members seeking to sell the property or exit the LLC.
Even members holding equal interests in an LLC do not automatically become co-owners of its real estate.
Although members may consider themselves owners of the property, their membership interests do not confer direct ownership rights. See 459 Washington Ave., LLC v. Atkins, 230 A.D.3d 1282 (2d Dept. 2024); Sealy v. Clifton, LLC, 68 A.D.3d 846 (2d Dept. 2009).
Only where an individual holds a direct ownership interest in the real estate—rather than merely owning a membership interest or right to distribution—may partition become available under RPAPL §901(1).
Accordingly, because partition is unavailable to members based solely on their membership interests, they must consider alternative remedies—dissolution, winding up, and distribution of the LLC’s assets—subject to statutory requirements and the terms of the LLC’s operating agreement.
However, this situation can become complex when members holding equal interests in an LLC disagree over whether the company should be dissolved.
As noted in our prior article, “Rules on Partitioning Ownership Property Rights,” (New York Law Journal, 8/16/2022)the Second Department has held that an LLC member cannot maintain an action for partition of property owned by the LLC in the member’s individual capacity.
More recently, in Atkins, supra, the Second Department reaffirmed the principle established in Sealy. Atkins involved three members of an LLC which owned real property. The plaintiffs sought partition and sale of the property, alleging that the individual members “held title…as tenants in common, each possessing a one-third undivided interest.”
However, the court determined that the property was owned exclusively by the LLC, rather than by its individual members as tenants in common. Relying on LLC Law §601, the court held that the members had “no [direct] ownership interest in the property.”
Thus, even assuming the members held equal interests in the LLC, their membership interests did not establish the ownership rights necessary to maintain a partition action under RPAPL §901(1).
Significantly, the court also noted that there was “no allegation or evidence that the LLC ha[d] been dissolved or that [its] affairs ha[d] been properly wound up” under LLC Law §703.
Although Atkins does not establish a new rule, it reinforces the distinction between ownership of an LLC and ownership of its real property. For members seeking to resolve disputes involving LLC-owned real estate, the decision highlights the importance of utilizing the correct legal procedures and pursuing the appropriate remedies, including dissolution and winding up—which may involve the sale or distribution of LLC assets.
Dissolution Under LLC Law
Limited Liability Company Law provides two methods for dissolving an LLC.The first is Limited Liability Company Law §701, which permits dissolution upon specified events outlined in an LLC’s operating agreement, including events that trigger dissolution within an LLC’s governing documents, such as a specified date, time, or events, a member vote, or written consent where applicable.
However, if an event of dissolution has not occurred, or if the members of the LLC do not agree to dissolution, the member seeking dissolution must rely on Limited Liability Company Law §702, which separately authorizes a member or their representative to seek judicial dissolution whenever it is no longer “reasonably practicable” to carry on the business in conformity with the LLC’s articles of organization or operating agreement.
Matter of 1545 Ocean Ave., LLC, 72 A.D.3d 121 (2d Dept. 2010) is the leading authority on this standard.In that case, two entities each owned 50% of an LLC formed to acquire and develop commercial rental property, and the operating agreement generally permitted either manager to act independently.
The managers disputed construction costs, unilateral decisions, and one manager’s use of his own construction company. Buyout negotiations failed.As a result, one member commenced a special proceeding seeking dissolution based on alleged management deadlock, and the trial court ordered dissolution.
On appeal, the Second Department held that, in order to establish that it is not “reasonably practicable” to carry on the business of the LLC, the petitioning member seeking dissolution must establish that “(1) 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.”
Despite substantial evidence of ongoing disputes concerning the real estate development project, the Second Department reversed the trial court’s order of dissolution, holding that the inability of members to work together does not automatically establish that the LLC cannot carry on its business.
For an entity whose purpose is broadly defined as owning and managing real estate, continued ownership and rental operations may be enough to defeat dissolution even after the relationship that produced the investment has collapsed.
This principle was recently reaffirmed in TZ Vista, LLC v. Helmer, 235 A.D.3d 691 (2d Dept. 2025), wherein the court reiterated the importance of evaluating the LLC’s continued operation under §702. The decision emphasizes that disagreement alone does not necessarily result in a finding that the LLC is not reasonably practicable to carry on its business where the stated purpose has not been frustrated, and operation is still financially feasible.
If the LLC remains financially feasible, exclusion from management and distributions from profits will not establish grounds for dissolution. See e.g., Doyle v. Icon, LLC, 103 A.D.3d 440 (1st Dept. 2013\). Likewise, if the stated purpose of the business continues to be achieved and the business remains financially feasible, dissolution may not be permitted even in situations of oppressive conduct where the members’ relationship has deteriorated significantly. See Matter of Kassab v. Kasab, 195 A.D.3d 830, 831 (2d Dept. 2021); Matter of Eight of Swords, LLC, 96 A.D.3d 839, 840 (2d Dept. 2012).
By contrast, in Amici v. Mazza, 234 A.D.3d 1170 (3d Dept. 2025), the court considered an LLC formed without an operating agreement or written documentation of its terms, but with articles of organization providing that no single person would manage or have authority of the property.The court concluded that because neither member has legal authority to act on behalf of the LLC, it would not be reasonably practicable for the LLC to carry on its business. The decision illustrates that a company’s organizational structure may prevent it from conducting the LLC’s business, thus warranting dissolution under §702.
Bringing an Action for Judicial Dissolution
A member seeking judicial dissolution of an LLC must commence special proceeding under Limited Liability Company Law §702 and CPLR Article 4 in Supreme Court in the county where the LLC’s office is located. The member files a petition, supported by competent evidence, demonstrating why continued operation is no longer reasonably practicable.
Competent evidence includes the operating agreement, articles of organization, financial records, communications between members, and documentation showing how the dispute affects the LLC’s operations or financial feasibility.It must connect the members’ dispute to the LLC’s inability to operate in accordance with its governing documents or that the continued operation is financially unfeasible.
Allegations that another member usurped control or thwarted a proposed sale do not necessarily establish sufficient evidentiary support that the LLC can no longer function. See Matter of FR Holdings, FLP v. Homapour, 154 A.D.3d 936 (2d Dept. 2017).Nor does evidence concerning the members’ conduct, unilateral control, or disagreements, without evidence demonstrating their effect on the LLC’s operation, may not be sufficient. See Matter of Ribeiro v. Libutti, 244 A.D.3d 861, 863 (2d Dept. 2025).
The evidentiary burden is particularly significant because a judicial dissolution proceeding is brought as a special proceeding rather than as a plenary action.Specifically, the petition and supporting papers must be served on the respondents with a notice of petition or an order to show cause, in accordance with Article 4 of the CPLR and any court-directed requirements.
The court may determine the petition on the papers if no material factual disputes exist.Otherwise, an evidentiary hearing or trial may be necessary.
If dissolution is granted, the applicant must file a certified copy of the dissolution order with the Department of State within 30 days of its issuance, and the LLC’s affairs must then be wound up in accordance with the governing agreement and applicable law.
Standard for Judicial Dissolution
This standard is aimed at protecting the entity, but it fails to account for when one of two equal members finds themselves blocked out of all decision making in a financially sound limited liability company. Put another way, an LLC can remain economically viable while a member’s investment becomes practically inaccessible.
A member may retain an interest on paper while having no opportunity to participate in the decision making of the LLC and no ability to turn his/her interest into tangible value. One member may exercise exclusive control while another retains an investment that cannot readily be sold or redeemed. Continued operations do not necessarily answer whether the members can continue to work together.
Alternatives to dissolution do exist, such as a claim for breach of contract, accounting, derivative claims, or a claim of breach of fiduciary duty (see, e.g., Korangy v. Malone, 161 A.D.3d 645 (1st Dept. 2018).However, those alternatives only provide a solution for past disputes and have no effect on the management of and decision making for the LLC moving forward.
Equitable buyouts provide a solution in some cases. In PFT Tech., LLC v. Wieser, 181 A.D.3d 836 (2d Dept. 2020), the court approved a buyout and valuation date based on the equities of the dispute. Significantly, the departing member had agreed that the majority could purchase his interest.
However, the decision does not establish an unrestricted right to compel a buyout whenever members disagree: the availability of such relief depends on the circumstances and should not be assumed in every dissolution proceeding. See Bailey and Desiderio, Distributing the Assets of a Limited Liability Corporation (New York Law Journal, 2/21/2025).
§702 Should be Expanded
The Legislature should expand §702 to permit dissolution when a sustained breakdown in the working relationship of an LLC’s members materially prevents co-equal members from exercising management rights and/or participating in the decision making for the LLC, even if the business remains feasible from a purely financial perspective.
Courts should consider the duration and seriousness of the conflict, the company’s management structure, the decisions the members can no longer make, and whether a contractual dispute resolution or exit mechanism offers an effective remedy.
The courts should require objective, competent evidence of the petitioner’s consistent exclusion from his/her management rights. Personal hostility or intermittent disagreements over minor decisions should not suffice.
Courts should also consider whether the petitioner manufactured the deadlock, refused to meaningfully engage in the management of the LLC, or rejected an available contractual solution. These safeguards would protect a legitimately profitable LLC, while permitting dissolution as a last resort when a member can demonstrate a sustained breakdown of proper management of the LLC under its operating agreement.
Until the law changes, operating agreements should define clear events of dissolution, procedures for resolving deadlock, and practical exit mechanisms. They should also include clear and mandatory buyout provisions that specifically address the method by which the assets of the LLC will be valued.
Careful drafting can protect members of an LLC to an extent, but statutory relief should not depend entirely on whether members anticipated the eventual breakdown when they formed the company. New York should make dissolution available when that breakdown is sustained and substantial, as proven by competent evidence.
Members of an LLC who find themselves consistently excluded from their management rights should not be required to wait until the LLC is no longer profitable, and therefore the vitiation of their investment, before dissolution is permissible.
Conclusion
The Legislature should reconsider whether the current standard for judicial dissolution places too high a burden on a member who is being consistently prevented from having a meaningful voice in the operation of the LLC. Although disagreement alone should not automatically require dissolution, the law should provide an option for members to separate their interests when continued co-ownership of the LLC is no longer practicable, to the detriment of one or more co-equal members.
In the meantime, attorneys should consider drafting operating agreements using provisions that establish clear dissolution events, exit mechanisms, buyout procedures, and rules governing the sale or distribution of real property, including establishing valuations methods and specifying how and when a sale must occur.
Adam Leitman Bailey is the founding partner of Adam Leitman Bailey, P.C. Courtney J. Lerias is a partner of the firm. Ryan Weinstein, an extern of the firm and second-year law student attending the Elisabeth Haub School of Law at Pace University, and Vicky Dong, an extern of the firm and second-year law student attending the Maurice A. Deane School of Law at Hofstra University, assisted in the preparation of this article.