shortsTraditions are good. This blog has two annual traditions. First, at the end of each year I write a post listing the year’s top ten business divorce decisions. Second, each August I offer readers who are (or ought to be) on summer vacation some light reading in the form of three, relatively short case summaries.

So here we are in what’s been a particularly felicitous August weather-wise (at least here in the Northeast U.S.), with another edition of Summer Shorts. This edition’s summaries feature two out-of-state cases — one from Florida involving expulsion of an LLC member and one from Delaware involving the valuation upon redemption of an LLC member’s interest — and a New York appellate court decision involving the removal of a limited partnership’s general partner.

The Anti-Chiu: Florida Court Upholds LLC Member’s Expulsion

Froonjian v Ultimate Combatant, LLC, No. 4D14-662 [Fla. Dist. Ct. App. May 27, 2015].  The Florida intermediate appellate court’s ruling in Froonjian makes for a fascinating contrast with New York case law represented most prominently by the Second Department’s 2010 decision in Chiu v Chiu holding that, absent express authorization in the LLC’s operating agreement, a member’s involuntary expulsion is not permitted. Going 180° in the other direction, the Froonjian court upheld the majority members’ expulsion of a minority member from a Florida LLC that had no operating agreement, reasoning that the Florida default statute vesting all decision-making authority in the members acting by majority vote encompasses the authority to expel a member.

Froonjian, which appears to be a first-impression decision, will have limited utility even in Florida due to that state’s adoption last year of its version of the Revised Uniform LLC Act which, as mentioned in footnote 2 of the Froonjian decision, contains a new provision expressly authorizing non-judicial member expulsion upon specified grounds, along with provision for judicial expulsion under broadly defined circumstances including wrongful conduct “that has affected adversely and materially, or will affect adversely and materially, the company’s activities and affairs.”

The formerly operative Florida default statute in Froonjian, vesting control of decision-making in the LLC’s majority ownership, essentially duplicates Section 402(f) of New York’s LLC Law. Should a future case arise involving expulsion from a New York LLC, perhaps some adventurous New York litigator, most likely in a case whose venue is outside the Second Department (because of Chiu), will use Froonjian as a stepping stone to argue that Chiu got it wrong.

Appellate Court Reinstates Claim for Wrongful Removal of General Partner Due to Ambiguity in Limited Partnership Agreement

GEM Holdco, LLC v Changing World Technologies, L.P., 127 AD3d 598, 2015 NY Slip Op 03398 [1st Dept Apr. 23, 2015]. The defendants’ removal of the plaintiff as a general partner of a Delaware limited partnership was just one of several issues decided by the First Department on appeal from a December 2013 decision and order by Manhattan Commercial Division Justice Shirley Werner Kornreich, granting in part and denying in other part the defendants’ pre-answer dismissal motion.

The removal dispute centered on a section in the limited partnership agreement appointing plaintiff’s affiliate as “initial General Partner.” The same section stated that “the General Partner shall serve as the General Partner” until the earlier of its resignation or the termination of the limited partnership. It further provided that the “General Partner . . . may be removed and replaced by the vote or written consent of the Majority of the Partners.”

The defendant majority partners relied on the latter sentence in removing plaintiff’s affiliate as General Partner. Plaintiff’s suit argued that the sentence did not apply to its affiliate as the “initial” General Partner, and that it only applied to a subsequent, replacement General Partner. Justice Kornreich agreed with defendants’ interpretation and dismissed plaintiff’s claims for breach of the limited partnership agreement.

On appeal, the First Department disagreed with Justice Kornreich, found that the agreement is “ambiguous,” and reinstated the wrongful removal claim. The appellate court found that the defendants’ interpretation of the section “would seem to render meaningless” the section’s provision stating that the General Partner “shall” serve in that role until it resigns or the limited partnership terminates. “As plaintiff argues,” the court wrote, that provision “can be reasonably read to apply to the initial general partner named in the [limited partnership agreement], while the [sentence authorizing removal] applies to a general  partner that is thereafter ‘selected’ by a majority of the partners and may also ‘be removed and replaced’ by the majority.” Finding neither party’s interpretation “clearly correct as a matter of law,” the court denied dismissal of the claim and directed the trial court on remand to consider extrinsic evidence to discern the intent of the parties.

Court Rules Calculation of Fair Market Value Under LLC Agreement’s Redemption Provision Needn’t Account for Capital Contributions

Hampton v Turner, C.A. No. 8963-VCN [Del. Ch. Apr. 29, 2015].  Vice Chancellor Noble’s letter opinion in this interesting case also deals with contract interpretation in the context of the redemption of an LLC membership interest triggered by a 23.54% member’s filing of a petition for judicial dissolution. The LLC exercised its option under the LLC agreement to redeem the member’s interest for “Fair Market Value” (FMV) as “determined by an appraiser . . . without taking into account any illiquidity or a discount for a minority interest.”

The mutually selected appraiser determined that the LLC had a FMV of about $1.9 million, but the outgoing and controlling members disagreed whether the members’ capital contributions (totaling about $1 million) should be deducted before determining the payment reflecting the outgoing member’s pro rata share. The defendant controlling members, in support of their motion for summary judgment, argued for deduction of the contributions based on the LLC agreement’s waterfall provision assigning priority to the return of capital contributions.

After stating that “Defendants make a sympathetic argument that [the waterfall provision] represents the basic business deal of the parties,” and that ignoring it would produce anomalous valuations for the members who made contributions disproportionate to their percentage interests in the LLC, Vice Chancellor Noble nonetheless sided with the plaintiff and denied the defendants’ summary judgment motion. First, the provisions governing redemption and FMV made no mention of the waterfall distributions. Second, “an arms-length sale and an appraisal would seem to consider net assets, not capital contributions.” Third, “in the business context, it is not a foregone conclusion that paying to buy units back from a member is a distribution.” Fourth, “[w]hen one contributes something of value to a business, she no longer fully owns that asset. If she wants it available upon terminating her relationship with that business, she should protect her rights in a contract.”