Michigan Court Enforces Written Withdrawal From LLC

Michigan Court Enforces Written Withdrawal From LLC

      A recent decision from Michigan reviewed and in turn rejected the efforts by a former member of an LLC who, after resigning therefrom, made claims including for reinstatement as a member.  The Michigan Court of Appeals upheld the application of the written resignation documents.  Clark v. Butoku Karate School, LLC, Docket No. 326638, 2016 WL 4419321 (Mich. Ct. App. Aug. 18, 2016).

      Joby Clark and John Wasilina were the two equal members of Butoku Karate School, LLC, a Michigan limited liability company.  The company was formed in 2002 to operate a karate studio.  In June, 2010 and thereafter, Wasilina learned of a rumor that Clark was engaged in a sexual relationship with an underage student of the LLC.  While Clark denied the rumors, he and Clark did agree that “even if meritless, [the rumors] would likely destroy the school because most of the students were children and parents were likely to withdraw their children.”  In light thereof, Wasilina caused there to be drafted agreements providing, inter alia, that Clark was withdrawing from the LLC and had no further claim on its assets. Those agreements were signed and delivered by Clark.  In connection therewith, Clark and Wasilina withdrew nearly all of the company’s operating funds and evenly split them.  Ultimately Wasilina would be twice charged with criminal conduct involving the underage student.  Both trials ended in a mistrial.  Clark thereafter entered a plea of no contest to a lesser charge.

      At some point thereafter, Clark initiated this suit against the LLC and Wasilina, alleging all of fraud, a failure to distribute and conversion of personal property.  With respect to the allegation of fraud, Clark:

[A]lleged that defendants had defrauded plaintiff because Wasilina had induced plaintiff to sign the documents by misleading plaintiff into believing he would later be reinstated in the company, and also by promising to pay plaintiff for his membership interest.

The trial court granted summary judgment to the defendants, and this appeal followed

     With respect to the failure to distribute, the Court of Appeals first considered whether the operating agreement served to override the statutory default rule that would otherwise provide for the distribution to withdrawn member of the fair value of their membership interest.  MCL § 450.4305.  The court found that the written operating agreement did address the question of rights to a distribution upon withdrawal, and therefor controlled over the LLC Act. Further, the agreements signed by Clark and Wasilina in connection with Clark’s withdrawal from the company provided in part:

The Company accepts immediate withdrawal and resignation of Member Joby Clark from any and all aspects [of] the company … Joby Clark’s interest in the company is extinguished in its entirety without a substitute or financial compensation. ….  nor does the Company owe any monies, duties, rights, responsibilities, privileges, accountings, or any other items or tangible means of remuneration in any way to the resigning Member, Joby Clark. (Bracketed language and italics added by the court).

      With respect to the effect of this release, the court found that it constituted an amendment to the operating agreement.  As such, Clark had no claim against the LLC for a liquidating distribution.

      With respect to the allegation of fraud, and again reviewing the language of the release agreement indicating that Clark had no further claim against the LLC, the court stated that “It is difficult to imagine language more definite in ending a business relationship.”  Applying as well general contract rules as to the effect of an agreement, the court observed:

Rather, plaintiff admits that he understood the actions that the documents authorize, but chose to believe that the opposite result would occur.  If, as plaintiff suggests, an oral statement was made contrary to the explicit language of the documents that he signed, plaintiff’s reliance was not reasonable.

     With respect to the claim of conversion, its dismissal was upheld on the grounds that the plaintiff had not indicated what actions the defendants had taken to deprive the plaintiff of his property.  In addition, the consent to withdraw provided that he had already removed all of his personal property from the company’s location, and anything that was left behind was to become company property. As the company now had a right to possession to the property left behind, there could be no claim for conversion.