Transcript : LLC Dispute Resolution Strategies
Etan Mark | 00:00:01:09 – 00:00:34:21
So Michelle and I — Michelle, for those of you who don’t know, recently moved down here from New York and she is an exceptional attorney, barred not just here, but in the Empire State, where I, too, am barred. So occasionally we have the opportunity to litigate on cases up in in the Northeast. We’ve got a particularly interesting case involving a intra family dispute concerning probably a couple of dozen apartment buildings in mostly Brooklyn. And I think there’s a lot of sort of interesting components to this case. The case is still pending. But I think one of the very interesting components that Michelle maybe you could chime in on is sometimes you work on a case and the opposing party is objectively unreasonable and there’s some challenges that come with that. And I’d be sort of curious to hear what you think about sort of what you think works and doesn’t work in those circumstances.
Michelle Genet Bernstein | 00:01:03:13 – 00:01:27:15
You know, I think trying to understand where the opposing party is coming from, even if we don’t necessarily see eye to eye or even understand where their positions might be coming from or what grounds they might have for taking certain positions, trying to understand what it is that they’re objectives are can help us better inform our case strategy and explain to our clients, okay. While this doesn’t make sense on paper or according to logic, this is what the other side is trying to accomplish. And, you know, if we’re looking to try to resolve the matter, let’s see if we can find a way to get there or at least make the other side think that they’re getting there so that we can get the result that we’re looking for.
Etan Mark | 00:01:47:05 – 00:02:07:17
Yeah, I think that’s right. I mean, there’s sort of two sides to the coin in my experience when you’re dealing with somebody who’s just wackadoo on the other side. First, you’ve got to do a real active job in managing client expectations because, you know, clients get into this and they look at you and they say, this doesn’t make any sense. Why is the other party acting this way? This is not a rational business actor, and sometimes you’re not dealing with rational business actors especially I find in family related litigation cases where, you know, they’re aggrieved siblings or spouse ex-spouses or something to that effect. I think the other side of the coin is sometimes it’s Michelle’s point. You’ve got to kind of travel down the rabbit hole and sure, you’ll find yourself kind of in Wonderland with the other party.
But sometimes there’s an exit that is a lot more palatable to your client than you ever thought possible, because you’re playing in the same crazy world that the opposing party is. Now, that particular case had some really interesting legal issues, and we’re embarking on sort of a pretty intricate strategy concerning it relating to the dissolution of limited liability companies and the effect, the legal effect of an assignment for a legal effect of a member making an assignment,
if there’s an operating agreement that precludes or prohibits those kinds of assignments, and this is sort of a nuanced area of the law that Michelle and I apparently get pretty deep on trying to give sort of a 30 second primer on that.
Michelle Genet Bernstein | 00:03:33:22 – 00:03:56:08
Sure. So there are laws that are specific to limited liability companies in almost every state. New York, of course, has their own set of laws. And there’s a particular law that says if your operating agreement precludes assignment and you go ahead and assign your membership interest to either a related party, a friend, a business associate, what have you. There are certain implications that go along with that assignment, and there are different types of assignments you can assign in full where your other LLC members agree to accept the assignee as a member and that assignee becomes a full member. They have voting rights, they get to participate in management, they get rights to access to books and records.
They also get rights to distributions. Now there are other assignments where if they’re not member, the assignee is not admitted as a new member. That assignee has very limited rights. That assignee typically cannot bring in breach of fiduciary duty claims on behalf of the company. They’re not allowed to participate in management. Essentially, they’re relegated to only receiving the members distributions and not much else.
And when you have a situation like in our case, where there have been assignments, mostly for estate planning purposes, tax related purposes, that have no real practical effect on who the actual individuals are that are participating in management of of the LLC. It gets a little bit more complicated because who actually has rights to take actions? How have things been done over the last decade, decade plus in this?
And this is somewhat typical in these situations where there are these families, where losses are created and certain members might not even know that they have membership interests in these organizations. But all of a sudden, you know, money gets involved. People realize there might be value and they jump in and say, hey, you know, you’re not a member.
You are participating as a member of the last ten years. Everything you did is now void and gone. I am the sole controller, even though I’ve never had any involvement in this case or in this company for years. So, you know, these are these are laws that perhaps members might not think about when they’re making the assignment, and they may not realize the implications of their actions until it comes to a head in a litigation five years later.
So long story short, I was talking about the law. The law does the law has this mechanism in place for assignments to work. That said, most LLC laws say, you know, operating agreement notwithstanding. So if you have an operating agreement that governs what happens with an assignment that that controls the law really doesn’t do anything. It’s a contract.
That’s somewhat convoluted.
Etan Mark | 00:06:09:08 – 00:06:29:21
No, no, no. It’s really concise and crystal clear. I think that she just came up in jury duty, so we’re going to cut her some slack.
I think to give her sort of an example is let’s say you’ve got an entity that owns $15 million worth of assets and you have three members that are each equal members of the LLC. Okay, A, B and C are the three members of the LLC. There’s a provision in the operating agreement that governs the rights and obligations of the members that says you cannot assign your interest to anybody for any reason. And you, Simon, is void. Well, a mr. A is not a lawyer. He may not be the sharpest tool in the shed. He may not have read the operating room. And he decides, you know what, I’m going to assign this my interest to, let’s say, a trust that I created for the benefit of my grandchildren. And he then takes his one third interest. I he signs it to that trust. Two days later, he wakes up and he’s like, Oh, my God. The operating agreement prohibits me from assigning this to the trust. He then assigns it back to himself. There’s a whole body of law that says that even though he kind of assigned it back to himself, that the moment that he assigned his interest to this trust, his membership rights in the LLC, go poof, they completely extinguish. He still is the financial owner of 5 million or a third of the value of the entity.
But he no longer has any voting rights. He no longer has any management rights. He has no longer any ability to participate in the day to day business of the LLC. It’s kind of a funky nuance that a lot of lawyers I don’t think know, and certainly many, many people who are partners and or members, co members of these LLC don’t know either.
And the lesson here is read your documents, get lawyers. Like I said a little bit earlier today to a colleague, an ounce of prevention is worth a pound of cure. And this is one of those cases where a whole lot of heartache could have been avoided had those t’s been crossed. And those are as mandated.
Michelle Genet Bernstein | 00:08:18:20 – 00:08:48:15
And just to add on when these assignments happen and the member who is signs essentially vitiate his right to participate in management, not only does he do that to himself, but it shifts the balance of power for the decision maker. So if there are three members and one assign his rights away, what could have been a majority becomes a 5050 situation where there can be much more opportunities for deadlocks, which ultimately might end up putting the parties in court, because once they can’t decide.
That’s when litigation happens. That’s when you have to get third parties in to come break ties. So there are all of these dynamics that can shift once these assignments happen. It’s not just a I made a mistake. Now I want to go back and trace it. A lot can change very quickly.
Etan Mark | 00:09:03:07 – 00:09:05:11
You know. So that’s that case.
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