LLC Distribution Needs Definition

LLC | LImited Liability Company Distribution of Profits

The Appellate Division sent a case back to the trial judge to figure out exactly what the owners of an LLC meant in a settlement agreement when it referred to when it linked a contingent payment to a “distribution.”

The case, which involves a relatively modest amount in dispute, is a cautionary tale arising from the use of a statutorily defined term in a context in which it just wasn’t clear what the parties were referring to. One of the parties pointed to the dictionary and the other the text of the statute.

Be Careful with that Word

In Fishbone v. Chase Partners, LLC, No. A-4003-13T3 (App. Div. Feb. 26, 2016), the issues arose out¬†of a series of agreements in which the Plaintiff was to receive a payment of $125,000 after any “capital event” that resulted in a “distribution” to Defendants. A capital event was a sale, refinance or other transaction that produced net cash.

After various settlements and motions to enforce, the various parties and entities reorganized themselves and a payment was made to Defendant Clark Hamilton. Fishbone sued, alleging that the payment was a distribution and entitled him to collect the $125,000 under his compensation plan.

Fishbone won partial summary judgment, but the trial judge was reversed. The defendants argued that distribution meant “distribution” in the corporate context. Plaintiff said distribution mean any transfer.

The parties dispute the interpretation of “distribution.” Defendants apply the term in a corporate context and argue it means a transfer related to an equity interest in a company, and that the payment made here was not of that nature but rather it was consideration for settling the litigation which related to outstanding expenses rather than an equity interest. As the Union LLC had no profits to distribute, and neither defendant had contributed any capital to return, this payment could not be considered a distribution. Fishbone argues that the term is unambiguous and should be given its ordinary meaning, that it encompasses any transfer of money or assets. He states that even if defendants’ definition is accepted, the payment made by ARC to Chase nevertheless qualifies as it was consideration for ARC’s acquisition of Chase’s interest in the Union LLC.

No Help from RULLCA

The appeals court looked at the definition of distribution in the Revised Uniform Limited Liability Company Act (RULLCA), N.J.S.A. 42:2C-2. The statute defines distribution as “a transfer of money or other property from a limited liability company to another person on account of a transferable interest. A transferable interest is the right to receive distributions that flows from a membership interest.

On appeal, the court held that the record was too ambiguous to decide the case on summary judgment.

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