In the Matter of Yuchen Lin, for the Judicial Dissolution of XS Franchise, L.L.C. v Xu Sun
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Attorneys and Parties
Brief Summary
A fitness studio franchise ownership dispute involving an alleged promise to transfer a 40% interest in a StretchLab franchise limited liability company to the manager of the studio.
The lower court dismissed the petition and all causes of action, finding that petitioner never became a member of XS Franchise, L.L.C. and therefore lacked standing to seek dissolution and related relief, and it also denied respondent's request for attorneys' fees and costs.
The Appellate Division reinstated the causes of action for breach of contract, unjust enrichment, and promissory estoppel.
Although petitioner failed to show she became a formal member of the limited liability company, she adequately alleged that respondent agreed to give her a 40% ownership interest in exchange for services and capital contributions, that she performed and paid, that respondent kept the benefits without transferring the interest, and that she relied on his promise to her detriment.
Background
On November 18, 2022, Xu Sun entered into a franchise agreement with StretchLab Franchise, LLC to operate a fitness studio franchise. Under article 14.3 of that agreement, he formed XS Franchise, L.L.C. and assigned his franchise rights to it. Yuchen Lin managed the Union Square StretchLab location and alleged that Sun agreed to transfer to her a 40% membership interest in XS Franchise in exchange for her services and capital contributions, while Sun would retain 60%. Lin then brought claims seeking declaratory relief, judicial dissolution under Limited Liability Company Law § 702 [judicial dissolution of a limited liability company; by its terms applies only to members], liquidation and a receiver under Limited Liability Company Law § 703 [winding up and related relief following dissolution], and multiple contract and tort-based remedies.
Lower Court Decision
The Supreme Court, New York County, granted Sun's motion to dismiss and denied his request for attorneys' fees and costs. It concluded, based on documentary evidence under CPLR 3211(a)(1) [dismissal based on documentary evidence], that Lin never became a member of XS Franchise because she did not comply with the franchise agreement's requirements for admitting new members or transferring ownership interests, and did not execute the instrument required by the operating agreement. The court also dismissed the remaining claims, including breach of fiduciary duty, implied covenant of good faith and fair dealing, conversion, and fraud.
Appellate Division Reversal
The Appellate Division modified the order by denying dismissal of the fourth cause of action for breach of contract, the fifth cause of action for unjust enrichment, and the eighth cause of action for promissory estoppel, and otherwise affirmed. It agreed that Lin lacked standing to pursue dissolution-related claims because she never became a formal member of the limited liability company, and it also affirmed dismissal of the fiduciary duty, implied covenant, conversion, fraud, accounting, and waste or mismanagement claims. However, it held that Lin sufficiently pleaded a contract to transfer an ownership interest in exchange for services and capital, Sun's enrichment from her contributions, and a clear promise on which she relied to her detriment. The court also upheld the denial of fees and costs under 22 NYCRR 130-1.1 [sanctions and fee awards for frivolous conduct], finding the petition was not frivolous.
Legal Significance
The decision distinguishes between formal membership rights in a limited liability company and personal claims arising from an alleged agreement to convey such an interest. A person who has not satisfied the governing franchise and operating agreement requirements to become a member cannot seek dissolution or other member-only remedies under Limited Liability Company Law § 702. But that same person may still pursue contract, quasi-contract, and promissory estoppel claims based on promises, services rendered, and money contributed in reliance on an expected ownership transfer.
Failure to become an official limited liability company member bars dissolution and other member-based claims, but it does not defeat well-pleaded claims that someone promised an ownership stake in exchange for work and capital and then failed to deliver it.