Friday, November 15, 2019

When Previously Agreeing Members Disagree

When Previously Agreeing Members Disagree

Peter Mahler, in his blog New York Business Divorce, has this week reviewed a long-running dispute between the co-members of a New York LLC that owns valuable real estate. In a posting titled Operating Agreement Spawns Multiple Disputes Between 50/50 Members of Realty Holding LLC, Peter reviews the numerous decisions and appeals that have arisen in this case. HERE IS A LINK to his review.

There is an element of the most recent decisions that struck me. In this instance, at one time, each of the members agreed that a management company owned by one of the members would be in charge of the day-to-day management of the property. After the falling out, the other member (i.e., the one who did not have an ownership interest in the management company) objected to it continuing to serve in that role. My initial reaction would have been in the nature of “well, having agreed that it would be the management company, and not having imposed any time limits, it remains the management company until such time as a majority of the members decide otherwise.” And I would be wrong.

Rather, those facts, both the trial court and the appellate division held, inter alia, that the continuation of the management company in that role is subject to, in effect, one of the members deciding that should no longer be the case. Specifically:

[T]he continued decision to keep Win Win Asset Management LLC as the managing agent of the company is also a major management decision for the Company, and requires a majority vote. Given that Rubin and Baumann each hold a 50% ownership stake in the Company, the parties are deadlocked as to this fundamental decision regarding its operations.

This capacity to revoke prior agreements as to how an LLC will be operated presents, depending upon your viewpoint, great opportunities for mischief and great opportunities to reset the relationship. That said, written agreements are always recommended. If, for example, there was a written operating agreement with Win Win for a particular term, the lifting of consent would not have any impact until the end of that term and the decision of whether to renew the agreement or enter into a new agreement with a new management company. In this instance, there was apparently no written management agreement between the LLC and that management company.

In this respect, I am reminded of the decision Kirksey v. Grohmann, 754 N.W.2d 825 (S.D. 2008), it involving a four member LLC. The LLC held certain land that was used for livestock grazing and ranching activities. In this instance, the purpose of the LLC, as set forth in its operating agreement, was specific and included “to engage in the general livestock and ranching business.” Id. at 830. That property was leased by the LLC to two of the four members. Two of the members sought to terminate the lease agreements, which termination was opposed by the two members who were the beneficiaries of those arrangements. “Because Grohmann and Randall had no desire to terminate the lease or dissolve the LLC, the parties remained deadlocked.” 754 N.W.2d 827.

Still, focusing upon the intent that all of the four members (the members were all sisters) would share equally in the LLC’s management and operation, the court observed:

Although each sister has an equal vote, there no longer exists equality in the decision-making. Grohmann and Randall have all the power with no reason to change the terms of a lease extremely favorable to them. Leaving two sisters, half of the owners, with all of the power in the operation of the company cannot be a reasonable and practicable operation of the business. Id. at 831.

On that basis a judicial dissolution of the LLC was ordered, in effect allowing the two members to revoke their prior consent to leases of the LLC’s property.

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