LLC assets sold for oppressive behavior

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But order may have unwanted tax consequences

“Oppressive” conduct by a member of a limited liability company is grounds for ordering dissolution of the LLC, the Wisconsin Court of Appeals held on Nov. 28.

In light of the decision, however, attorneys may wish to consider the potential tax consequences of standard provisions in LLC operating agreements.

David and Frederick Decker are brothers, who for many years were in the investment real estate business, which they operated through a number of LLCs. In 1995, they reorganized the business by entering into an operating agreement that formed a new LLC, Decker Investments, LLC.

The brothers began having business disputes, and, on March 18, 2002, David declared a deadlock. Frederick did not believe that a deadlock existed and requested that David rescind the deadlock letter sent to him, but David refused.

On July 11, 2002, pursuant to a provision in the operating agreement, Frederick made an offer to buy David’s interest in the businesses for $7 million even though the interest was worth only approximately $2.5 million, according to appraisals that had recently been done.

David accepted the offer, but Frederick took no steps to close the offer at the inflated price. Under the terms of the operating agreement, dissolution was the only option remaining.

In September, David brought suit in Milwaukee County Circuit Court, seeking damages for his loss of the benefit of the bargain, because of Frederick’s offer and subsequent failure to buy his interest. The trial court appointed a receiver to perform an accounting, oversee existing personnel, ensure proper management of the company, and sell the properties.

David proposed to buy Frederick’s interest in the properties at the values set by the receiver, and the trial court ordered him to do so. However, Frederick obtained a stay of the order and appealed. David cross-appealed, arguing he was entitled to damages as a result of Frederick’s reneging on his offer.

The court of appeals affirmed on Sept. 6, but later withdrew its opinion after motions for reconsideration from the parties. On Nov. 28, it issued a new opinion, by Judge Patricia Curley, again affirming the trial court, but directing the trial court on remand to correct the order to reflect that the assets of the LLC are to be sold to David, not Frederick’s interest in the LLC.

The court first held that the trial court was correct in concluding that the $7 million offer by Frederick was not enforceable, notwithstanding David’s acceptance of it.

The operating agreement provided that, if the offering party fails to close the purchase, then the offeree shall have the option to buy out the offeror at the same price.

Under these terms, the court concluded that the agreement anticipated that an accepted offer might not close, and specifically provided for remedies other than specific enforcement of the offer.

The court determined, “the agreement did not require the offeree to actually close on the properties, and the agreement contains no penalty provisions if an offer is made and the purchase is not closed.”

Accordingly, the court affirmed on David’s cross-appeal.

Turning to Frederick’s appeal, the court also affirmed, rejecting his argument that the trial court lacked authority to order the sale of his interests to David, and that the properties must be sold on the open market, instead.

First, the court agreed with the trial court that Frederick’s actions constituted “sabotage” of the op
erating agreement’s provisions for buy-out, by offering $7 million for David’s interest when it was worth only approximately $2.5 million, and then making no effort to close on the offer.

The court concluded, “[H]e foreclosed the possibility that one of the two would buy out the other according to the terms of the operating agreement. This is so because while David was anxious to be the seller at $7,000,000, he was not inclined to be the buyer at that figure. This left dissolution as the only remedy available under the operating agreement.”

Turning to the agreement, the court found the trial court’s order was permissible.

Paragraph 13.c of the operating agreement provided that, “If … the dispute is not resolved, the Members shall take all necessary actions and use their best efforts to cause all directors elected by them to take all necessary actions to liquidate and dissolve the Company in accordance with the law.”

The court concluded, “The trial court’s appointment of a receiver started the liquidation process. … David’s offer was no different from any other third-party offer, except that it was for all the property interests held by Frederick and it eliminated costly real estate commissions and other miscellaneous costs.”

Before concluding, however, the court addressed another provision of the agreement, par. 9.a, which provides that the company shall be dissolved “(2) Upon the sale of all of the real estate owned by the Company,” and if “(3) [t]he company has only one (1) Member.”

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Paragraph 9.b. continues: “Upon the dissolution of the Company, the Company shall take full account of the Company’s assets and liabilities and the assets shall be liquidated as promptly as consistent with obtaining the fair market value thereof.”

Reading paragraphs 13 and 9 together, the court concluded, “only the sale of the assets of the LLCs would be consistent with the dissolution process agreed upon by the Deckers in their operating agreement. …

Because the written order … authorizes the receiver to transfer to David all interests of the LLCs, we order the trial court’s order be corrected to reflect the sale of the assets, not interests, consistent with the terms of the Deckers’ operating agreement (emphasis in original).”

The court also noted that sec. 183.0902 provides that a court may order the dissolution of an LLC if one or more members acts in a manner that is “illegal, oppressive or fraudulent.” The court concluded that Frederick’s “outrageous offer” constituted oppressive behavior.

The court acknowledged adverse tax consequences for David, but concluded, “under the specific terms of the operating agreement, a sale of LLC interests would occur only when an LLC is to continue to exist as a viable company. Here, the operating agreement mandates dissolution of the company. Thus, a sale of the assets must occur (emphasis in original).”

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