An LLC Masquerading As A Partnership

The outcome of business divorce cases often depends upon whether a litigant is an owner of the business entity.

Less often, the outcome depends upon what kind of entity the litigants own.

From time to time, the variety of business organization the parties own, and the correct rules of law governing their relations as co-owners, can be murky and blurred.

One might assume that the kind of entity in which its owners invested should be self-evident. After all, the menu of options is pretty limited: sole proprietorship, joint venture, general partnership, limited partnership, corporation, and limited liability company.

Imagine taking a New York general partnership, a New York limited liability company, the separate rules of law governing each, and putting them in a blender.

That’s a lot like what one encounters in Durmaz v Santos (Decision and Order [Sup Ct, NY County Aug. 9, 2026), a recent decision by New York County Commercial Division Justice Andrea Masley.

The rules governing general partnerships and LLCs – which business owners may alter by contract – provide opposite outcomes:

• General partnerships dissolve automatically upon death of a partner (see Partnership Law § 62 [4]).

• LLCs, on the other hand, do not dissolve automatically upon death of a member (see LLC Law §§ 701 [a] [4], [b]).

• General partnerships, by definition, require more than one partner (see Partnership Law § 10 [1]).

• LLCs, on the other hand, do not require more than one member, and single-member LLCs are common (see LLC Law § 203 [c]).

• Upon dissolution, general partners generally lack the power to compel the buyout of another partner, ordinarily requiring wind up, liquidation, and pro rata distribution of the partnership’s net proceeds (see e.g. Partnership Law § 60, 61, 68, 71). Exceptions are for partnership continuation upon death or retirement of a partner (see Partnership Law § 73), or upon wrongful partnership dissolution (see Partnership Law § 69 [2] [b]).

• LLC members, on the other hand, have the power, in exceptional cases, to compel a forced buyout of another member in lieu of the entity’s dissolution though the often requested, seldom granted “equitable buyout.”

Durmaz was a mashup of these rules of law, with an outcome that would not have been possible solely under partnership law, or solely under LLC law, requiring a Solomonic combination of the two to achieve the ultimate result: an appraisal process and buyout.

Alexis Santos (“Santos”) and Rumi Durmaz (“Durmaz”) were co-members with other individuals of an unsuccessful Manhattan radiology business called AMRIC LLC (“Amric”). Amric’s business failed, and its members decided to sell the assets in an auction process. At the time of the auction, Amric owed Santos $3.2 million and Durmaz $1.1 million. At auction, Durmaz made a successful credit bid and acquired Amric’s assets (allegedly, on behalf of himself and Santos).

According to the petition, the plan was for Santos and Durmaz to form a new entity after the auction to take assignment of Amric’s assets and operate a radiology practice as “equal, 50/50 partners” at the same location as Amric, attaching an email from shortly before the auction as evidence of a “partnership” agreement.

Shortly after the auction, Durmaz, as organizer, filed articles of organization for a new company, Central Park Advanced Imaging Center LLC (“CPI”).

A month later, before Santos and Durmaz could get around to finalizing and signing an operating agreement for CPI, Santos unexpectedly died.

When Santos died, Durmaz was left to finance and run the nascent business himself. According to his petition, he asked the fiduciaries of Santos’s estate (the “Estate”) to support the fledgling business but they declined.

Durmaz’s legal position evolved to one where, according to him, there was never more than a mere provisional general partnership to eventually form and operate an LLC, an occurrence which never materialized without an operating agreement, and the general partnership dissolved by operation of law upon Santos’s death. According to Durmaz, he was, and remained, sole member of CPI because he was the organizer under its articles of organization. Without a signed operating agreement, Durmaz argued, Santos was “never admitted as member of the LLC before his death.”

There were some vulnerabilities to Durmaz’s legal position.

First, contemporaneous evidence from CPI’s own lawyers demonstrated that the agreement between Santos and Durmaz always was to operate in the form of an LLC, not a partnership, and the LLC’s documents, including an operating agreement, were well underway when Santos passed.

Second, Durmaz’s formation of the LLC preceded Santos’s death by exactly one month. An LLC comes into existence upon filing of its articles of organization. No operating agreement is required. New York LLCs operate without them all the time.

Third, the designation of someone as “organizer” on an LLC’s articles of organization bears no relationship to its actual membership structure (see LLC Law § 203 [b]).

Fourth, if an LLC lacks an operating agreement, it is still a perfectly viable entity. The LLC Law supplies a statutory operating agreement through the default statutes.

Fifth, even nonfinal, unsigned operating agreements are potentially enforceable under the right circumstances.

Opposing the petition, the Estate argued – persuasively – that the main reason Durmaz “re-characterized” the parties’ enterprise as a partnership not an LLC was because Durmaz would never have been able to satisfy the challenging legal standard for judicial dissolution under LLC Law § 702, so he would have been stuck in co-membership with the Estate, at least until winding up of the Estate, under LLC Law § 608.

You can read the three briefs on the petition here, here, and here.

But at oral argument, the Estate’s counsel conceded: “Our bottom line position is we want to be bought out. We don’t think it should be dissolved, we just have an issue with the valuation.” The Court responded: “Exactly my point. . . . I mean, come on, let’s just get to . . . what this is about, which is the valuation and figure out a fair way to do the valuation.”

To get to that valuation, the Court had a creative solution: treat the business as a partnership for dissolution purposes, but an LLC for buyout purposes:

The partnership is dissolved pursuant to § 62 (4) which states that a partnership dissolves by operation of law upon the death of any partner, absent an agreement to the contrary. There is no written agreement here. In the absence of a written agreement, the most equitable method of liquidation is a buy-out (Matter of Superior Vending, LLC, 71 AD3d 1153, 1154 [2d Dept 2010]).

Earlier this year, Peter Mahler wrote about a partnership masquerading as an LLC. Durmaz strikes me as the opposite – an LLC masquerading as a partnership.

Where a partnership consists of three or more partners, and one of the partners dies, the two remaining partners are free to continue the partnership and to pay the deceased partner’s estate the “value” of his or her former interest in the partnership (see Partnership Law § 73).

But, like in Durmaz, where a general partnership becomes a partnership of one, it is no partnership at all, and there is no partnership to continue. Strictly speaking, under the Partnership Law, with only one remaining general partner, the outcome should have been a liquidation of the partnership’s assets. But Durmaz acquired those very assets just months before the dissolution event. Why go through another liquidation event?

Alternatively, if the business were an LLC, there almost certainly would not have been grounds to dissolve the entity, leaving Durmaz and the Estate dysfunctionally trapped in a business together. So the Durmaz Court fashioned a unique solution, improvising the rules of law a bit to achieve a mutually-beneficial solution.