If you’ve studied New York dissolution law, you know that, unlike proceedings involving close corporations, there’s no statutory authority for a court-ordered buy-out when a member of a limited liability company petitions for judicial dissolution under LLC Law § 702.
You also know, especially if you follow this blog, that notwithstanding the absence of such authority, on a few occasions New York courts have invoked their common-law powers of equity to compel buy-outs in LLC dissolution cases, or have reached the same result by characterizing the buy-out as a form of liquidation.
The selected valuation date can make a critical difference in determining the value of an equity interest in the business. In dissolution proceedings involving close corporations, the statute authorizing a buy-out election, Business Corporation Law § 1118, stipulates valuation as of the day before the filing of the petition. We don’t have similarly definitive guidance on the LLC side because there’s no enabling statute, but the few LLC cases decided so far suggest some answers.
The clearest statement in any case I know about is found in PFT Technology LLC v Wieser, Short Form Order, Index No. 8679/12 [Sup Ct Nassau County May 21, 2014]. It’s an unusual case in which, in July 2012, the LLC’s majority members brought suit in the LLC’s name against a minority member for breach of fiduciary duty and damages, and also seeking judicial dissolution under LLC Law § 702. The minority member’s answer requested a “fair valuation” of his membership interest in the company.
Almost two years after filing the action, and after the court issued a novel ruling on the question of advancement of legal expenses (read here my post on that ruling), the LLC sought an order setting a valuation date for the buy-out. The LLC argued that the valuation date should be the date upon which the dissolution action was commenced, in July 2012. The minority member apparently did not argue for a different date, although he did seek for valuation purposes certain financial records subsequent to the action’s filing date.
The court’s decision, by Nassau County Commercial Division Justice Stephen A. Bucaria, noted that the LLC Law does not expressly authorize a buy-out in a dissolution proceeding, but that “a buy-out may be an appropriate equitable remedy” in certain circumstances. He also noted that the LLC Law “is silent as to how the membership interest of the member who is to be bought out is to be valued and the valuation date.”
Justice Bucaria then looked to the Business Corporation Law for guidance, specifically to BCL § 1118, on the basis of which he declared that the valuation date is July 9, 2012 — the day before the LLC filed its lawsuit.
Justice Bucaria could have cited, but did not, his own decision three years earlier in Matter of Gold (Cosmo Holdings LLC), Short Form Order, Index No. 6722/11 [Sup Ct Nassau County Oct. 26, 2011]. In that case, he denied a § 702 dissolution petition brought by the minority member of an LLC but nonetheless found a common-law entitlement to be bought out for fair value, to be determined “as of the date of the filing of the dissolution petition.”
The few other LLC buy-out cases involve highly fact-specific circumstances from which it’s difficult to extract a general rule concerning the valuation date. In Lyons v Salamone, 32 AD3d 757 [1st Dept 2006], the appellate court upheld an order dissolving the LLC and ordering as “an equitable method of liquidation . . . either party to bid the fair market value of the other party’s interest in the business, with the receiver directed to accept the highest legitimate bid.” In other words, the valuation occurred by means of, and as of the date of, the auction.
In Matter of Superior Vending, LLC, 71 AD3d 1153 [2d Dept 2010], the appellate court affirmed, as an “equitable method of liquidation,” Westchester County Commercial Division Justice Alan Sheinkman’s order in an LLC dissolution case that the respondent repay the petitioner’s original capital contribution in exchange for his membership interest. The award included interest on the contribution from November 2002 — the closest I can get to conjuring up a valuation date in this case, since it wasn’t called that — when the two members terminated their business relationship, which was about four months before the petitioner filed the first of two successive dissolution petitions.
The last case I’ll mention is Mizrahi v Cohen, 104 AD3d 917 [2d Dept 2013], an LLC dissolution case in which the appellate court granted the petitioning 50% member’s request to compel the respondent 50% member to sell his membership interest to the petitioner. The court remitted the case to the trial court for determination as to the value of the respondent member’s interest in the LLC which owns a commercial building in Brooklyn.
Brooklyn Commercial Division Presiding Justice Carolyn Demarest subsequently ordered a new appraisal of the realty based on a finding that “real property values in [Brooklyn] have changed significantly since [the previous appraisal],” thereby indicating that the court would value the membership interest close in time to the new appraisal and not as of when the petitioner commenced the dissolution proceeding a few years earlier.
The court’s choice of the later valuation date, as opposed to the date of the filing of the dissolution proceeding, possibly could be influenced by the fact that, unlike in the usual buy-out scenario where the party being bought out is also the party who commenced suit, in Mizrahi the purchasing party brought the suit demanding the buy-out.