Monday, June 23, 2014

West Virginia Considers When Interest Begins to Accrue on the Redemption of an LLC Member

West Virginia Considers When Interest Begins to Accrue
on the Redemption of an LLC Member

      In a decision earlier this year from the West Virginia Supreme Court, it considered when statutory interest would begin to accrue on the liquidating distribution due a withdrawing member.  The West Virginia Court found that the interest began to accrue from the withdrawal even though the amount of the liquidating distribution was not determined until a subsequent court action.  Marrara v. Ripley Associates, LLC, 755 S.E.2d 120 (W. Va. 2014).
      Marrara was the co-trustee of a trust that was in turn a member of Ripley Associates, LLC, owning a 25% share thereof.  The LLC was organized under the original West Virginia LLC Act, it being based upon the original Uniform Limited Liability Company Act, and was “at will,” meaning a member could withdraw and receive a liquidating distribution.  The trust decided to withdraw from the Ripley LLC.  In that Operating Agreement did not specify how the interest of the dissociating member would be valued, that was left to the LLC Act.  The LLC tendered an offer to purchase the trust interest for $413,727.35, which offer the trust rejected.  Thereafter, an action was filed in state court to determine the value of the interest.
      In a questionable feat to evaluation, the Court would determine that the LLC as a whole was worth $2,000,000 and that the “fair market value” of the trust’s interest therein was $500,000.  The trial court as well ordered that interest, at the rate of 7%, would begin to run from January 15, 2013, the date the valuation determination was made.  The trust appealed, arguing that interest should run from November 4, 2011, the date it tendered its notice of dissociation and as well the “as of” the company’s valuation.
      After reviewing the statutory language, including departures in the West Virginia LLC Act from the Uniform Act, the Court determined that:
When a member dissociates from at-will limited liability company, the interest provided by § 702(e) is to be calculated from the date of dissociation determined under § 701(a)(1).
Consequently, the Supreme Court held that the trial court improperly limited the payment of interest from the time the value of the trust’s interest in the LLC was determined, rather than going back to the effective date of dissociation.

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