September 13, 2016

Supreme Court Sets Standard to Expel Member from Limited Liability Company

by Jay R. McDaniel, Esq.

The Revised Uniform Limited Liability Company Act adopted in New Jersey permits a court to expel a member of a limited liability company when it is not reasonably practicable for the company to continue with that individual as a member.
Expulsion, known as involuntary dissociation, based on the not reasonably practicable standard requires a showing that there is a structural impediment to the members continuing in business together, such as deadlock.
When the company is able to make decisions and pursue its business purpose, the not reasonably practicable standard does not exist, whatever the level of animosity among the members.

September 6, 2016

Partnership Dissolution Presents Factual Issues

by Jay R. McDaniel, Esq.

In a case turning on an unusual provision in West Virginia partnership law, the state Supreme Court sent a partnership dissolution action back to the trial judge to determine whether the plaintiffs were actually partners of the partnership that they were trying to dissolve.

The opinion in Sugar Rock, Inc. v. Washburn (Supreme Ct. Appeals June 3, 2016) turned on a specific, and unusual, provision in West Virginia law that requires that an interest in “mining partnerships” to be in writing. The existence of a statute of frauds, however, doesn’t mean that this is not a question that arises with some frequency.

Formation of General Partnership Under RUPA

August 12, 2016

Trial Judges Have Discretion to Dissolve an LLC or Dissociate a Member

by Jay R. McDaniel, Esq.

Limited Liability Company Attorneys Petitioning members and managers of limited liability companies need to choose carefully between dissolution and dissociation of a member when they initiate litigation to expel a “bothersome” member. If the petitioning member includes grounds for both, they will not be able to choose the preferred remedy. Rather, the trial judge has discretion to choose between the two remedies without consideration of the preferences of any of the parties. The District Court of Appeals has held that the D.C. Code “substantially mirror[s]” language in the Revised Uniform Limited Liability Company Act (RULLCA), which grants discretion to trial judges to decide between dissolution and dissociation when grounds for both causes of action are present.

‘Shall Be Disassociated’ Does Not Compel Remedy

The D.C. court’s decision in Reese v. Newman, 131 A.3d 880 (D.C., 2016) disagreed with the appellant’s interpretation that the statue’s language compelled trial judges to disassociate a member of an LLC when one of the enumerated grounds for expulsion has been established. C. Allison Defoe Reese, the appellant, argued that the language “a person shall be disassociated” was a command to the trial judge to disassociate the appropriate member and removed the judge’s discretion to choose between the remedies.

August 1, 2016

Single Member LLC May Be a Poor Choice for Asset Protection

by Jay R. McDaniel, Esq.

Asset Protection, Charging Order — LLCs Can Protect Individual Assets From Judgement Creditors

One of the principal reasons for forming a business entity is to protect the owners from personal liability for the debts of the corporation. At the same time, business owners may use the business, most often a limited liability company, as a way to protect their business interests from being at risk for personal liabilities.

Understanding how a charging order could ultimately be applied is particularly important for individuals in high-risk professions. This includes not just the professionals like doctors or engineers, but also anyone who routinely deals with intellectual property, including patents, copyrights, trademarks and trade secrets. In all of these areas, the insurance coverage is poor and the risk is high. For that reason, many individuals will seek to hold assets inside of other vehicles, including a limited liability company.

August 1, 2016

Fraud Claim Against Yankee Star Derek Jeter Survives

by Jay R. McDaniel, Esq.

Derek Jeter promised his new business partners that his ownership and support of the Frigo brand of men’s underwear would not conflict with the superstar Yankee’s obligations to sportswear giant Nike. In return, RevolutionWear, Inc. gave him 15 percent of the company and a seat on the board.

Apparently, Nike did not take too kindly to Jeter becoming well-known as one of the principal owners of a competitor, and when the athlete failed to embrace the brand — $50 undershirts and $100 briefs — the relationship spun out of control. Jeter filed suit first, seeking a declaration supporting his conduct. RevolutionWear counterclaimed, alleging fraud and breach of fiduciary duty.

The decision of the Delaware Chancery Court in Jeter v. Revolutionwear, Inc., C.A. No.11706-VCG (Del. Chancery July 19, 2016) points out some of the pitfalls in trading equity for services. Once Jeter was on board, according to the plaintiff’s counterclaim, he was loathe to be publicly associated with the enterprise, or in other words, to live up to his obligations.

July 25, 2016

Buy-Sell Agreements: Planning for the Business Divorce

by Jay R. McDaniel, Esq.

Few of us have the liquidity that we need to contemplate the divorce while we are making plans to get marriedIt just doesn’t enter our minds at the time and, of course, when if it does later become an issue, it is way too late to come to an easy decision about how to handle the breakup.

The same is true for businesses. It is difficult to get the new business owners to focus on what they will do if one leaves — and the probability is that one will — when they are in the formation mindset. It’s a type of honeymoon, I suppose, full of optimism and promise. And yet, experience says that if the business survives long enough, the absence of a buy-sell provision is going to create an issue, and maybe event a lawsuit.

Business owners need to reflect on the fact that with enough success, they will want to retire, or may become disabled or die. That they might want to bring children into the business. Or that one of them will undergo some type of personal change or circumstances that just makes it impossible to carry on. A company’s organizing documents without a buy-sell in some form or fashion is incomplete. It keeps the litigators happy, but it’s not wise. Chris Mercer’s blog post here talks about some of the elements that you find in a reasonable buy-sell agreement.

July 18, 2016

Parties to Arbitrate MD Expulsion

by Jay R. McDaniel, Esq.

070116_1250_PartiestoAr1 The subject of the Appellate Division’s recent decision in Ames v. Premier Surgical, LLC, Docket No. A-1278-15T1 (June 29, 2026) is who decides whether a dispute is subject to mandatory arbitration. But the nature of dispute here suggests a cautionary tale about withdrawal and valuation, and what happens when the exit rules from a business don’t have clear valuation provision accepted by all as fair.

Limited Liability Company Valuation Dispute Triggered by Member Departure

The direction that you’re headed at the time certainly determines the parties’ perspective in business divorce and succession cases. Here the office to buy a retired surgeon’s shares was just 2.5 percent of his demand, and only about 13 percent of what the membership units cost 15 years earlier.

June 27, 2016

Partner Who Wrongfully Dissolved Partnership Hit With Whopping 66% Minority Discount

by Jay R. McDaniel, Esq.

Talk about playing your cards wrong.

A partner with a 3.08% interest worth $4.85 million in a partnership that owns a major shopping mall likely will walk away with only a few hundred thousand dollars after a court decision finding that he wrongfully dissolved the partnership and deducting from the value of his interest the other partners’ damages including legal fees, a 15% discount for goodwill, a 35% marketability discount, and a whopping 66% minority discount.

Last week’s decision by the Brooklyn-based Appellate Division, Second Department, in Congel v Malfitano, 2016 NY Slip Op 03845 [2d Dept May 18, 2016], rejected the partner’s appeal from the trial court’s determination of wrongful dissolution and also upheld its valuation determination with one major exception: the appellate court held that the trial court erred by failing to apply a minority discount and that it should have applied a 66% minority discount based on the “credible” expert testimony “supported by the record.”

June 27, 2016

Goodwill Valuation is Key in Professional Partnership Valuations

by Jay R. McDaniel, Esq.

The limited liability partnership or LLP is a highly popular form of business association for professional practices including law firms and medical groups. As its name suggests, the LLP combines the attributes of a partnership with the limited liability traditionally associated with corporations, except that professionals in LLPs generally remain personally liable for their own misconduct or negligence.

See How to Avoid Bad Blood Over Goodwill in Professional Partnership Valuations

This is a story about a recent case involving a fight over the inclusion or exclusion of goodwill in valuing the interest of a retired partner in a medical practice organized as a limited liability partnership, and how it easily could have been avoided.

February 11, 2016

Majority Rule Creates Fiduciary Duties

by Jay R. McDaniel, Esq.

The three majority members of a five-member limited liability company decide that they want to take a major action, such as selling the assets of the business or buying another business. They present the decision to the minority and proceed over their objections (We’ll assume for the moment that the action is permitted by the Operating Agreement.) The minority are bitterly opposed. Is this a problem? Often, it is.

Majority Rule and Minority Rights

The line between what is a right as an equity owner and what is a breach of fiduciary duty to the minority members is often blurry. We presume that as the owner of equity in a business, be it a limited liability, partnership, or a corporation, that we have the right to vote our economic self interest.

The Revised Uniform Limited Liability Company Act adopted in New Jersey permits a court to expel a member of a limited liability company when it is not reasonably practicable for the company to continue with that individual as a member.

Expulsion, known as involuntary dissociation, based on the not reasonably practicable standard requires a showing that there is a structural impediment to the members continuing in business together, such as deadlock.

When the company is able to make decisions and pursue its business purpose, the not reasonably practicable standard does not exist, whatever the level of animosity among the members.

Formation of General Partnership Under RUPA

‘Shall Be Disassociated’ Does Not Compel Remedy

Limited Liability Company Valuation Dispute Triggered by Member Departure

Majority Rule and Minority Rights