Hop Farmers Face Membership Forfeiture As A Deadlock Breaker And A Bitter Lesson On Pleading Shortcuts

If 2025 saw an increase in New York courts' willingness to favorably consider whether deadlock between members is, standing alone, sufficient grounds for judicial dissolution of LLCs (see here, here), it's only natural to expect increased litigation over deadlock breaking mechanisms. If mere deadlock between the members could warrant dissolution of an LLC, a provision containing an agreed-upon method of breaking that deadlock would stop a dissolution proceeding in its tracks.

The Appellate Division, Second Department delivered last week a fascinating case pitting a deadlock-based LLC dissolution petition against an equity forfeiture provision in the parties' operating agreement. Add to that a bracing reminder that lazy pleadings and procedural missteps in special proceedings can be outcome-determinative, and Ribeiro v Libutti, 2025 NY Slip Op 06865 (2d Dept Dec. 10, 2025), becomes a cautionary tale for business owners and litigators alike.

The Hop Farm, Operating Agreement, and Forfeiture Provision

In 2014, Marcus Ribeiro and Pat Libutti formed Craft Master Hops LLC for the purpose of acquiring a 20-acre farm and growing hops to feed the then-booming craft beer movement.

While Craft Master was a limited liability company, Ribeiro and Libutti executed a "Partnership Agreement" defining their respective rights. While the agreement is a bit non-conventional, it is clearly the product of careful planning and negotiations between Ribeiro and Libutti. It contains a detailed business plan, precise divisions of responsibility between Ribeiro and Libutti, non-competes, terms related to employment of family members, and dozens of other contingencies.

The Craft Master Agreement also contained a forfeiture provision triggered by "significant breach[es]"—breaches of specific obligations in the Agreement. A member in significant breach of the Agreement would automatically forfeit 1% of his membership interest to the non-breaching member:

The provision goes on to state that "[t]he breeching [sic] partner can be forced to sell his stake in the business on demand . . . using valuation guidelines outlined in this agreement minus 25% of the appraised value."

With Crop Yield Down, Libutti Claims Ribeiro Is in "Significant Breach"

By May of 2022, Craft Master's hop farm faced lower than anticipated crop yields and resulting financial instability. In accordance with the terms of the Craft Master Agreement, Libutti sent Ribeiro a letter claiming that he was in significant breach of their agreement, thus triggering the 1% equity forfeiture.

Among other misconduct, Libutti alleged that Ribeiro wrongfully dedicated his time to his other businesses, misused the Company's farm space—including for growing other vegetables and for storage of equipment and materials related to Ribeiro's other businesses—and failed to work 40 hours per week at the farm.

Deadlock on Draft: Ribeiro Seeks Dissolution

Ribeiro responded to Libutti's letter with a special proceeding seeking dissolution of the company under section 702 of the LLC law. He argued that the lower crop yields made continuation of the company financially unfeasible. And despite attempts to work together, he and Libutti were deadlocked in the management of the company, which deadlock paralyzed the company and made a path to profitability impossible.

Libutti Counterclaims, and Ribeiro Goes Flat on Reply

Libutti asserted counterclaims arising from the alleged misconduct that formed the basis of his original letter to Ribeiro. Fifty paragraphs long, Libutti's counterclaims contained detailed facts alleging that Ribeiro essentially abandoned the hop farm in favor of his other business interests. He further alleged that Ribeiro grew other vegetables on Craft Master's farmland and utilized Craft Master's space for his other businesses.

In response to those allegations of misconduct, Ribeiro served a one-page reply, stating only that Ribeiro "denies knowledge or information sufficient to form a belief as to the truth of each and every allegation."

Under New York's pleading rules, a party may respond to an allegation by denying knowledge of information—essentially stating that the party does not have the information to determine whether the allegation is true or false. Such a response, termed a "DKI," typically operates as a general denial. That is undoubtedly what Ribeiro (or his lawyers) were counting on in their reply. But there's a wrinkle: a litigant cannot "deny knowledge or information," where the information needed to respond to the allegation is wholly within his control. In those circumstances, a DKI acts as an admission.

Due to that wrinkle, Ribeiro's general DKI actually admitted facts establishing his significant breaches of the Craft Master agreement.

Trial Court Enforces the Forfeiture Clause

Suffolk County Commercial Division Justice James Hudson denied Ribeiro's petition for dissolution. Justice Hudson found it "uncontroverted" that Ribeiro was in significant breach of the Craft Master Agreement. As a result of that breach, Ribeiro had forfeited 1% of his equity and voting rights in the Company, and there consequently could be no deadlock; Libutti was in charge.

The Second Department Affirms

By Decision and Order dated December 10, the Second Department affirmed Justice Hudson's order. The Second Department found that:

1. Ribeiro's general DKI was properly deemed as an admission of his significant breach of the Craft Master Agreement;
2. The Trial Court correctly found that those significant breaches triggered the 1% equity forfeiture provision of the Agreement, putting Libutti in charge;
3. With Libutti in charge, there was no deadlock—within the context of the parties' agreement—rendering continuation of the LLC impracticable; and
4. The Trial Court did not need to hold a hearing, since Ribeiro commenced the action as a special proceeding and failed to accompany his petition with competent evidence warranting a hearing.

Several Takeaways on Tap

Appellate Division decisions often are cryptically terse. But given the weight of their authority, we're duty bound to mine them as exhaustively as possible. Ribeiro yields a bounty of important takeaways.

Penalty/equity forfeiture provisions. The last equity forfeiture provision we covered was in Atlantis Mgt. Group II LLC v Nabe (2022 NY Slip Op 30399[U] [Sup Ct, NY County 2022]). The Atlantis Court held that a provision in the operating agreement stating that any member's breach of the agreement—however trivial—triggered the non-breaching member's right to purchase the breaching member's interest for $1.00 was unenforceable as against public policy. The Court in Ribeiro, by contrast, had no difficulty enforcing the Craft Master Agreement's forfeiture provision, which applied only to defined significant breaches, and triggered a forfeiture of only 1% of the member's interest. While too-onerous forfeiture provisions run the risk of unenforceability, careful ones can be a powerful deadlock-breaking mechanism.

Pleading shortcuts = brutal results. In its simplest form, Ribeiro is a textbook warning about the dangers of a lazy reply. The Second Department clearly had no patience for Ribeiro's blanket "denial of knowledge or information" to matters plainly within his knowledge. Pleading shortcuts may save time on the front end, but they can quietly hand your adversary the case.

Special Proceedings vs. Plenary Actions. The Second Department also docked Ribeiro for failing to include with his petition any competent evidence that continued operation of the LLC had become financially unfeasible. The Court highlighted that "[U]nlike a complaint in a plenary action, a petition in a special proceeding must be accompanied by competent evidence."

The irony here of course is that Ribeiro had the choice. Unlike in corporations, where dissolution actions must be commenced as a special proceeding, an LLC member may seek dissolution either in a plenary action or a special proceeding. A painful reminder that procedural decisions should not be made lightly.

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