Tuesday, November 27, 2018

A Few Interesting Points as to Dissolving an LLC

A Few Interesting Points as to Dissolving an LLC
      A recent decision from the Utah Court of Appeals points out a few interesting facts and principles applicable in the dissolution of an LLC. Unfortunately, many of the most interesting points were not preserved for review by the plaintiff, so the Court of Appeals was able to avoid them. Still, the case is interesting reading. Blanch v. Ferrell, 2018 UT App. 172, 2018 WL 4261526 (Utah Ct. App. Sept. 7, 2018).
      Blanch and Ferrell were, with three other brothers, the owners of certain real property in Utah as well as shares in an irrigation company. In 2005 they conveyed all of those assets to an LLC in which each was an equal 20% member. There was no written operating agreement. The articles of organization provided a three year lifespan for the LLC. The LLC expired in 2008, but it was not until 2015 that any efforts were taken to wind up its affairs. At that time, four of the five members adopted a written resolution authorizing the sale of the company’s assets and authorizing the Ferrell to be in charge of that process. Blanch filed this lawsuit, alleging a variety of theories including that the approval of the asset sale required unanimous approval, and he objected. The District Court granted the defendants motion to dismiss, and this appeal followed.
      Initially, the court noted that Blanch had made three arguments with respect to the written consent of the four of the five members authorizing the sale of the LLC’s. He alleged (i) that the consent was a backhanded effort to amend the LLC’s articles of organization, which would be invalid without unanimous approval, (ii) that the written consent was approved without any notice to him, notice being required by the then applicable LLC Act, with the effect that it is invalid and (iii) that two of the four signatories were actually assignees without voting rights. The court, with respect to these arguments, found that none of them had been made below to the District Court and thus could not be raised on appeal.
      Next, Blanch argued that the written consent needed to be unanimous because, with the adoption of Utah’s new LLC Act, acts outside the ordinary course require unanimous approval. Under the predecessor LLC Act, in effect at the time of the adoption of the written consent, actions outside the ordinary course require the approval of two-thirds of the members. In effect, Blanch argued that, with the effectiveness of the new LLC Act, all prior approvals became subject to the new unanimous standard. The Court of Appeals, after having first assessed the written consent under the old law and found it to be effective thereunder, turned its attention to the new law. The court rejected the supposition that the effectiveness of the new law “had the effect of invalidating previous actions taken by a limited liability company.” 2018 UT App 172, ¶ 28.
      Ultimately, Blanch sought a partition of the LLC’s property so that he could retain 20% of it in his own name. Here the court was able to hoist Blanch on the petard of his argument that the new LLC Act is applicable. Under it, in winding up a company, surplus assets must “be paid in money.” Id. at footnote 5, citing Utah Code Ann. § 48-3a-711(4). Applying this provision, the court held, inter alia, that he could not receive hard assets in substitution for money.

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