Appellate courts usually defer to a trial court’s factual findings in a business divorce case that
makes it to trial. Here is a rare decision, however, in which the Appellate Division reversed the factual determinations of the trial judge, finding that the disputed ownership interest had been conceded by one of the parties.
Limited Liability Company Decision is Reversed
The case, Surgem LLC v. Adhievmed, Inc., Docket No-A4198-11T! (October 16, 2013) involved a dispute between a successful surgeon, John Hajjar, who established a chain of same day surgical centers and his former business partner, John Seitz. The businesses, and the relationships, were poorly documented, however, and the outcome turned on the issue of whether the parties had made an oral agreement.
We represent clients in the formation stages of limited liability companies as well as during disputes. Consult with us about limited liability operating agreements and disputes between members.
LLC Operating Agreement
Notably absent from the Appellate Division opinion is any mention of the terms of the LLC’s operating agreement. It appears that this is another case in which the owners of a business failed to document the basic details of their relationship and the trial court had to fashion a decision from evidence that was equivocal – or so the trial court thought.
We do a lot of chest thumping around here about the importance of good documents – an operating agreement, buy-sell agreements, plans for orderly withdrawal and valuation – because in almost every litigated business divorce case, it is the organizational documents that are at the root of the dispute.
Business Divorce in Surgical Center Development Company
Hajjar had opened several surgical centers when he met Seitz, who was initially hired as a marketing consultant to review marketing software that Hajjar was using. The two formed a business together, Achievmed, and Hajjar invested some $650,000 over the next two years. They also developed a model for the syndication of surgery centers and started a new business, Surgem, LLC, which over the next few years, created and funded centers for about $13 million.
Surgem syndicated the surgery centers, kept an equity interest of received fees under a management contract. Seitz was installed as the president of Surgem, for which he was to be paid salary and a bonus based on the management fees earned by the country. He was also to receive 300,000 shares of stock, vesting over four years.
The dispute turned on whether a later promise to grant all of the shares, rather than have them vest over time, had been made by Hajjar. Seitz was ultimately fired and he sued to have his interests repurchased.
Ousted President Claims Rights as Dissociated LLC Member
Seitz ultimately filed a counterclaim seeking the forced repurchase of his interests as a dissociated limited liability company member. The court found that he had, in fact, been dissociated when he was terminated as president. The answer to that question, however, did not resolve the fundamental dispute.
After a six-day trial, the court found that the termination was with good cause, but that because of the vesting schedule, Seitz was only entitled to 175,000 shares, comprising 3.74 percent of the company, and valued at about $158,000 . Seitz appealed, claiming that Hajjar had agreed to the immediate vesting of the shares.
The trial court had found that a private placement memorandum, on which Seitz relied, bore a forged signature. However, the appellate Division found that “substantial, credible evidence shows Hajjar orally agreed to amend the initial transaction terms.”
Evidence of Oral Agreement to Issue Shares
The Appellate Division found, however, that Hajjar had conceded the existence of an oral amendment to the deal with Seitz, and that this agreement was supported by a course of conduct in which Hajjar was show to have received tax returns showing him as the owner of a 10 percent interest.
The Court went on to affirm the valuation that had been accepted by the judge and, based on its finding that Seitz initially owned 10 percent (he had transferred a portion of holdings to third parties, set the value of his 8.74% interest at $368,700.
Carefully drawn documents would have avoided this dispute. The absence of any motion of the operating agreement indicates either that one either did not exist or did not cover some very fundamental issues. Even if a lawyer was involved in the organization of a limited liability company, it is important to revise the LLC documents whenever circumstance changes.