Friday, July 10, 2020

It Appears He Gets to Buy a 39.65% Interest in a Bankrupt Company

It Appears He Gets to Buy a 39.65% Interest in a Bankrupt Company

      In a recent decision from the North Carolina Business Court, it was held that one of the two former shareholders of a business corporation gets to buy out the other owner in the LLC notwithstanding the fact that the LLC has meantime undergone a Chapter 7 liquidation. Mason v. Mason, 2020 NCBC 42, 2020 WL 2768874 (May 26, 2020).

      Julie and Richard Mason, formerly married, were shareholders in Multiflora Greenhouses, Inc. (“MGI”). While the ownership of the balance of the shares is not addressed in this opinion, Julie owned 39.65% of the outstanding shares while Richard owed 39.63% of the outstanding shares. They were as well the only directors of MGI. In the course of their divorce proceedings, Julie filed an action for dissolution of the corporation. Thereafter she and Richard entered into an agreement, and reported to the court, that Richard was to buy Julie’s shares and, subsequent thereto, they agreed to a valuation date. Thereafter, and the opinion does not address the mechanism by which approval for doing so was given, MGI entered into Chapter 11 bankruptcy, which was subsequently converted into a Chapter 7 liquidation.

      As part of the motions considered in this decision, Richard sought to set aside the court orders with respect to his purchase of Julie’s shares. That the court refused to do. First, Richard’s obligation to purchase Julie’s shares was not pursuant to a court order, but rather to a private agreement between the parties. Further, notwithstanding the changed circumstances of MGI, the risk as to its position at the time of acquisition of Julie’s shares was his burden.

When Defendant agreed to purchase Plaintiff’s shares and stipulated to the date of valuation of the same, Defendant accepted the risk, and the potential benefits, of the possible future fluctuation of the value of MGI’s shares. If the value of MGI’s shares increase, Defendant stood to benefit; however, if the value of MGI’s shares decreased, it would be to Defendant’s detriment. Regardless of the “substantial change in circumstances” as described by Defendant, the Court declines to relieve Defendant from the agreement he made, with the advice of counsel, at the inception of this litigation. 2020 WL 2768874, *4.

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