Thursday, June 12, 2014

Retired Member of LLC Failed to Receive the Benefit of the Bargain He Thought He Had but He Did Get Everything to Which He was Entitled

Retired Member of LLC Failed to Receive the Benefit of the Bargain
He Thought He Had but He Did Get Everything to Which He was Entitled


      A recent case out of Maryland highlights the importance of appreciating the effect of withdrawal from an LLC prior to the time the interest therein is liquidated.  In this instance, a retired member realized substantially less than he thought he was entitled to.  In addition, the Court upheld amendments to the economic deal after the withdrawal, including a related party sale of the LLC’s sole asset, were valid.  Thomas v. Bozick, __ A.3d __, 2014 WL 2208394 (M.D. App. May 28, 2014).
      Thomas was a member of the architectural firm George, Miles & Buhr, LLC and as well a member of GMB Plaza, LLC, which limited liability company owned the building out of which the architectural firm operated.  Under GMB Plaza’s operating agreement, resignation from the professional practice was an event of involuntary termination, giving rise in the LLC a right (but not an obligation) to redeem the dissociated member’s interest on the terms set forth in the operating agreement.  After Thomas’ resignation, the purchase price as set forth in the operating agreement was calculated, and it was determined that it was well in excess of the fair market value of the related property.  On that basis, the LLC elected not to redeem Thomas’s interest.  The LLC did proceed, however, to reduce the rent being charged the professional firm, the reduced rental rate being based upon independent appraisals.  Thomas was not consulted with respect to this reduction in rent.  Thereafter, GMB Plaza’s property was again appraised, that appraisal for purposes of cash flow valuation being based upon the now reduced rental rate.  With those now updated appraisals in hand, a new LLC was formed amongst the then incumbent members of GMB Plaza and one third party.  Without consultation with Thomas, the real property was sold to that new LLC.  GMB Plaza proceeded to wind up and liquidate its affairs, sending Thomas a check for his prorata portion of the sales proceeds.  Thomas then brought suit challenging these various transactions.
      Initially, Thomas argued that he did not cease to be a member of GMB Plaza upon his resignation from the professional firm or that, in the alternative, to the extent he ceased to be a member, he came back into membership status upon the LLC’s election to not acquire his interest in the company.  On the basis of both the operating agreement and the Maryland LLC Act, the court rejected these suggestions.  Rather, it was clear that the company had only a right, and not an obligation, to acquire the interest, and it would be illogical to suggest that one could cease being a member and then return to membership status without compliance with the provisions of the act required for the admission of a new member.  Rather, the Maryland LLC Act provided, inter alia, that upon dissociation, a now former member becomes the assignee of their own membership interest.  Hence, from the time of his resignation from the professional firm, Thomas ceased to have any right to participate as a member in the management of GMB Plaza.
In sum, appellant’s membership in GMB Plaza ended upon his retirement, and only his economic interest in GMB Plaza, of which he was an assignee, remained.  As an assignee, appellant could not partake in the management of GMB Plaza or vote company matters.  He was not entitled to notice of meetings of GMB Plaza, nor could he participate in the decision to sell the Property or decide on the Property’s fair market value.  2014 WL 2208394, *8.
      In response to Thomas’s assertion that the reduction in rental rate was a breach of the operating agreement or effected to “obtain an artificially low price” for his interest in the company, the Court of Appeals affirmed the trial court’s dismissal.  Essentially, Thomas had not come forward with evidence demonstrating that the reduced rate was other than appropriate in light of prevailing conditions.  In addition, the reduction in rate did not implicate the operating agreement, it appearing that the lease agreement was an independent document (as one would assume it would be), and the managing member of GMB Plaza was permitted to set the rental rate.
      Turning then to the ultimate sale of the property from GMB Plaza, Thomas argued that, in being allowed to reset the rental rate and the valuation mechanism for the property, the then remaining members of GMB Plaza “could set any price for the Property without [Thomas’s] input, which clearly would violate the operating agreement and the fiduciaries duties appellants owed to [Thomas].  [Thomas] concludes that the lowered Property value “defraud[ed] [him] out of his fair share of the value of the [Property].”  2014 WL 2208394, *9.
      With respect to the departure from the valuation mechanism described in the operating agreement of GMB Plaza, the Court noted that it was to be utilized if the LLC determined to exercise its option to acquire Thomas’s interest therein.  In that GMB waived its right to exercise that option, the agreed-upon valuation formula was inapplicable.  From there, in that the sale price was determined by averaging two independent appraisals, and Thomas not having presented any evidence that those appraisals were not reliable, the grant of summary judgment to the defendants as to this point was affirmed.
      Essentially, Thomas’s objection was that GMB Plaza was not required to redeem his interest in the LLC at a valuation formula fixed as of the date of his retirement.  Unfortunately for him, that is not the deal he had negotiated.  Having granted only a call option, he was left to only passively receive the fruits of the transaction as subsequently negotiated without his input.

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