Wednesday, February 20, 2013

What You Write is What You Get – Option to Acquire Interest in LLC Enforced as Written

What You Write is What You Get – Option to Acquire
Interest in LLC Enforced as Written

      On Valentine’s Day the New York Court of Appeals gave a significant gift to the holder of an option to acquire an interest in an LLC and not otherwise requiring compliance with the terms of the LLC’s operating agreement.  Long Term Care Holdings, LLC v. Cammeby’s Funding, LLC, 2013 NY Slip Op 00951 (Feb. 14, 2013).
      Cammeby’s Funding LLC (“Funding”) is managed by Robin Schron (“Schron”).  Fundamental Long Term Care Holdings LLC (“Fundamental”) is owned by Grunstein and Forman.
      SWC Property Holding, LLC (“SWC”), originally controlled by Schron, had in 2003 acquired 26 nursing homes.  In 2006, Grunstein and Forman, through Fundamental, acquired those nursing homes.  While Fundamental had only $100 of contributed capital ($50 each from Grunstein and Forman), it borrowed the $10 million needed to buy the nursing homes.  Some six months after the sale of the nursing homes to Fundamental, it and Funding entered into an option permitting Funding to acquire a one-third interest in Fundamental for $1,000.  The option as well provided that upon its exercise Funding would be admitted as a member of Fundamental and contained a merger clause.
      Upon Funding’s delivery of its notice of exercise of the option, including a $1,000 certified check, Fundamental responded that Funding would as well need to pay the fair market value of a one-third interest in Fundamental, relying upon § 3.3 of its operating agreement, it providing in part:
Upon the issuance of any additional Interests, the Person to whom such Interests are issued shall make a capital contribution to the Company in respect of such issuance in an amount equal to at least the fair market value per Interest so issued.
That fair market value of a one-third interest was estimated to be $33 million.  Fundamental initiated a declaratory relief action to the effect that Funding had to comply with § 3.3 of its operating agreement.
      Noting that the option agreement was entered into between sophisticated parties, the Court of Appeals affirmed both the trial court and the Appellate Division.  The operating agreement, interpreted by its terms, set the acquisition price of $1,000.  It could have been provided that the complete exercise was dependent as well on satisfaction of the terms of the operating agreement, but it did not.  As for the argument that the sale of a $33 million interest for $1,000 is commercially unreasonably, the Court wrote that issues of reasonableness arise only when the contract is ambiguous, and this one was not.

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