Kirksey v. Grohmann

Supreme Court of South Dakota · 2008 · Corporations

754 N.W.2d 825 (2008)

Updated August 22, 2026

CorporationsLimited liability companiesJudicial dissolutionDeadlockLLCoperating agreementeconomic purposenot reasonably practicable

Facts

Four sisters inherited family ranch land and transferred their equal interests into an LLC, each receiving a 25% ownership interest; the LLC's stated purpose was to engage in a general livestock and ranching business, and one sister served as manager. The LLC leased its only asset, the ranch land, to certain sisters for grazing under a lease set in 2002, with the LLC paying taxes and insurance. Relations among the sisters deteriorated, and two sisters later sought to terminate the lease and dissolve the LLC, but both motions failed because the other two sisters opposed them and major actions required a majority vote. The operating agreement provided no method to break a tie or resolve deadlock, and the sisters communicated only through counsel.

Issue

Whether a court may judicially dissolve this LLC under SDCL 47-34A-801(a)(4)(i) and (iii) when the equal owners are deadlocked, the operating agreement provides no mechanism to resolve the deadlock, and the company continues in a way that serves only half of its owners. More specifically, the question is whether the LLC's economic purpose is being unreasonably frustrated and whether it is not reasonably practicable to carry on the business in conformity with the articles of organization and operating agreement.

Rule

Under SDCL 47-34A-801(a)(4)(i) and (iii), a court may judicially dissolve an LLC if the economic purpose of the company is likely to be unreasonably frustrated or if it is not reasonably practicable to carry on the company's business in conformity with the articles of organization and operating agreement. The standard is one of reasonable practicability, not impossibility, and the inquiry focuses on the company's ability to continue its stated purpose in accordance with its governing documents. Where equal owners are deadlocked, major decisions cannot be made, and the governing documents provide no way to break the tie or protect the company under changed conditions, continued operation may no longer be reasonably practicable.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Maya Chen and Owen Barrett each own 50% of Red Mesa Storage, LLC in Denver, Colorado. The LLC's operating agreement requires a majority vote for major actions, says the company will own and manage a warehouse, and contains no buyout or deadlock procedure. Maya wants to sell the warehouse after a dramatic market increase, but Owen refuses because his separate hauling business uses the building at below-market rent.

If Maya petitions for judicial dissolution under a statute authorizing dissolution when the economic purpose is unreasonably frustrated or it is not reasonably practicable to continue in conformity with the operating agreement, what is the strongest argument for dissolution?

Explanation. The majority held that the key inquiry is not whether the business can physically continue, but whether it is reasonably practicable to continue in conformity with the articles and operating agreement. Where equal owners are deadlocked, major decisions cannot be made, one side effectively benefits from the status quo, and the agreement contains no mechanism to resolve stalemate, judicial dissolution is proper.