LLC Member's Marital Woes Lead to Loss of Membership Interest
Shareholder agreements for close corporations often include provisions designed to protect the company and its shareholders against involuntary stock transfers or other potentially disruptive court decrees arising from the dissolution of a shareholder's marriage. The same holds true for limited liability company (LLC) operating agreements and their members. Sometimes, as this week's featured case illustrates, such provisions can backfire when a member's marital woes coincide with internal disputes among the LLC's members.
Matter of Madelone (Viscomm Group, LLC), 18 Misc 3d 1131(A) (Sup Ct Albany County 2008), involved an LLC formed in 2003 by three members to engage in advertising and public relations. Initially, the three members -- Whitten, Harrington and Madelone -- each held a one-third interest. Whitten served as manager. Subsequently, a fourth person was brought in as a 10% member, reducing the others to 30% each.
In 2005, when Whitten was experiencing marital difficulties, he proposed certain amendments to the operating agreement which the membership adopted. The amendments required a member who files, or whose spouse files, for legal separation or divorce to sell, and the other members to buy, the membership interest of the member involved in the marital proceedings. The amendments also established a method for computing the purchase price and the payment terms. The following year, Whitten filed for separation from his wife whereupon he relinquished his position as manager and was appointed to a salaried position with the company, only to be reinstated as a member and manager upon reconciling with his wife.
Continue Reading...Statute and Cases Create Uncertainty Over LLC Member's Right to Inspect Books and Records
Strained relations between managing and non-managing members of limited liability companies (LLC) sometimes lead to fights over the former's denial to the latter of access to company records. Section 1102 of the New York Limited Liability Company Law (LLCL) sets forth a three-part scheme governing the maintenance of, and member access to, LLC records.
The first part, Section 1102(a), requires that every LLC maintain five specific categories of records:
(1) if the limited liability company is managed by a manager or managers, a current list of the full name set forth in alphabetical order and last known mailing address of each such manager;
(2) a current list of the full name set forth in alphabetical order and last known mailing address of each member together with the contribution and the share of profits and losses of each member or information from which such share can be readily derived;
(3) a copy of the articles of organization and all amendments thereto or restatements thereof, together with executed copies of any powers of attorney pursuant to which any certificate or amendment has been executed;
(4) a copy of the operating agreement, any amendments thereto and any amended and restated operating agreement; and
(5) a copy of the limited liability company's federal, state and local income tax or information returns and reports, if any, for the three most recent fiscal years.
Note that the preceding list limits financial information to recent tax returns. This becomes more important under the second part, Section 1102(b), which provides for member access to LLC records including all the records mandated under Section 1102(a), as follows:
Continue Reading...Any member may, subject to reasonable standards as may be set forth
in, or pursuant to, the operating agreement, inspect and copy at his or her
own expense, for any purpose reasonably related to the member's interest
as a member, the records referred to in subdivision (a) of this section, any
financial statements maintained by the limited liability company for the three
most recent fiscal years and other information regarding the affairs of the
limited liability company as is just and reasonable.
Court Grants Specific Performance of LLC Members' Buy-Sell Agreement
On its surface, the case of Berle v. Buckley discussed below is about routine contract law, the question being whether an exchange of letters between two parties constituted a binding agreement or merely an unenforceable expression of intent. What makes it compelling reading is its wrenching setting -- the breakup of a family as well as a business -- and the undeniable, unpredictable human element at play as the two parties, one with a lawyer and the other without, made important decisions with known or unknown legal consequences in a tightly compressed time frame.
The Facts:
Beatrice Berle and Abdon Buckley never married, but for 13 years they lived and worked together on a 500-acre farm in upstate New York, producing organic goat cheese, straw and hay. They also produced two children. At some point, things went wrong for Berle and Buckley, very wrong. Berle accused Buckley of physical, sexual, verbal and mental abuse. In 2007, Berle petitioned the court for sole custody of the children and obtained a protective order banning Buckley from entering the farm property.
The farm business was owned through a limited liability company called Berle Farm, LLC, of which Berle held a two-thirds membership interest and Buckley held the other third. Wishing to sever her business ties with Buckley, Berle forwarded to him a letter addressed to her from her own lawyer, dated September 10, 2007 (the "September 10 Offer"), outlining how Buckley's interest could be purchased by Berle as well as the procedures for judicial dissolution of the LLC if Buckley refused to sell. The September 10 Offer proposed to purchase Buckley's interest for $268,666 based on the appraised value of the farm plus the fair market value of the LLC's assets and other equipment, net of a loan balance due Berle. It also proposed a lump sum payment subject to specified terms and conditions including a requirement that Buckley not enter into any farming operation or reside within 20 miles of the farm.
Buckley didn't have a lawyer. On September 12, 2007, Buckley and Berle's lawyer had a telephone conversation which the lawyer then confirmed in a letter sent by fax the same day to Buckley, advising him to retain counsel; confirming Buckley's agreement to the terms of the September 10 Offer except that Buckley wanted to farm and/or reside on family property in Cambridge, NY; advising Buckley that his latter proposal was acceptable if all other terms of Berle's offer were acceptable to Buckley; and informing Buckley that the purchase price needed to be adjusted to reflect Buckley's removal of "several thousand dollars of cash from the safe located at the Berle Farm property". The letter closes by requesting Buckley to "signify his consent to the foregoing terms by signing this letter in the space below" and returning it before the close of business on September 13, 2007, and that, otherwise, Berle will "commence legal proceedings for the dissolution of Berle Farm, LLC".
Continue Reading...Court Refuses to Apply Marketability and Minority Discounts in Valuing Deceased Partner's Interest
A federal appeals court once remarked that "the valuation of a closely held company is an inexact science", adding, "some might say an art" (Okerlund v. U.S., 365 F3d 1044 [Fed. Cir. 2004]). Looking at the gallery of New York valuation law, the artist must be Jackson Pollack.
By that I mean, the valuation rules seem like a hodgepodge when one compares the different settings in which interests in closely held companies are valued by the New York courts, including dissenting shareholder appraisals and oppressed minority shareholder buyouts under the Business Corporation Law, accounting proceedings under the Partnership Law, and equitable distribution proceedings under the Domestic Relations Law. This holds especially true with respect to valuation discounts, as highlighted in a recent appellate decision concerning a fractured partnership in a case called Vick v. Albert, 47 AD3d 482 [1st Dept 2008] (read decision here).
Vick involved a nasty family feud that spawned multiple litigations and arbitration lasting almost a decade. Beginning in 1975, Susan Vick and her brother, Richard Albert, co-owned a number of investment real properties in New York City. Some of the properties they owned as tenants in common, others were owned by partnerships in which Vick, Albert and others held partnership interests. Vick died in 1999, leaving her interests to her two children. About eight months after their mother's death, the children sued their uncle and others seeking, among other things, a partition of certain properties and a dissolution and accounting with respect to various partnerships. The complaint alleged that the uncle took exclusive control of the partnerships' books, records, properties and assets; that he misappropriated certain assets including rental income for his own benefit; and that he failed to wind up the partnerships' affairs after his sister died and failed to provide a final accounting for each of the partnerships. (The appellate court's decision unfortunately recites very few facts. More can be learned from the prior lower court decisions, two of which from 2001 and 2004 can be viewed here and here.)
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