Filed: December 27, 2016
Opinion by: Ronald B. Rubin
Holding: Judicial dissolution is an inappropriate remedy for deadlock over the identity of a managing member of an LLC where an LLC’s members have (1) a reasonable exit mechanism to receive fair value for their interest and (2) the Operating Agreement provides an alternative dispute resolution mechanism such as arbitration.
Facts: Plaintiff and Defendant, each a family limited partnership involved in a series of commercial real estate transactions since the late 1980’s, jointly operated a lucrative office and retail complex. Originally a general partnership, the joint venture’s organizational structure in 1999 converted to an LLC whose members were Plaintiff and Defendant, each with a 50% stake.
The Operating Agreement provided that Defendant would be the managing member with an initial 5-year term, followed by one or more successive 3-year terms if members unanimously consented to each successive term. Expiration of the initial term was met with acquiescence by both parties, and Defendant continued to serve as managing member of the LLC.
By 2013, operation of Plaintiff’s family business had passed through several hands and a separation of interests was proposed. Negotiations were contentious and unsuccessful. By late 2014, Plaintiff accused Defendant of material breach of the operating agreement, alleging improper authorization of an increased property management fee and exceeding its term as managing member without consent. At a members’ meeting, Defendant agreed not to increase the management fee, but refused to step aside as managing member.
Pursuant to the Operating Agreement, Plaintiff in 2014 filed a demand for arbitration to remove Defendant as managing member. Defendant filed a complaint in circuit court seeking a declaratory judgment that the matter was not subject to arbitration. Each party then withdrew their demands and attempted to negotiate a resolution. Negotiations ultimately failed, and Plaintiff filed the instant suit in mid-2015.
Plaintiff sought relief in the form of a declaration that Defendant’s term as managing member had expired, and judicial dissolution of the LLC. Defendant generally denied the allegations, sought a declaration that Defendant could remain as managing member, and requested that judicial dissolution be found an inappropriate remedy in such a dispute.
In March 2016, the court denied cross-motions for summary judgment and set a trial date for November. By June, Plaintiff filed an amended complaint alleging the parties were deadlocked, and moved for a preliminary injunction for Defendant’s removal as managing member. Plaintiff again requested judicial dissolution, but alternately requested appointment of a special fiscal agent.
At a preliminary injunction hearing in July, the court granted the motion in part, ordering removal of Defendant as managing member, but denied the request for judicial dissolution. At the hearing, the court learned that the property management firm, although an affiliate of Defendant, had run day-to-day operations for over fifteen years without serious complaint. The court found the parties’ unaddressed disagreements to be premised on the unsuccessful attempts to wind up the business, and allowed the property management firm to carry on in conformity with the Operating Agreement despite absence of a managing member.
In October, Defendant moved again for summary judgment, arguing that its removal as managing member rendered the complaint moot, and that any remaining operational or management disputes could be resolved by pursuing arbitration according to the Operating Agreement. The court denied the motion in favor of full examination of the parties’ relationship, motive, and intent.
Analysis: The court began by evaluating Plaintiff’s contention that judicial dissolution was the only remedy in light of the fact that without a managing member, the LLC could neither operate generally, nor operate in conformity with its Operating Agreement. Examining the Operating Agreement, the court found several sections reserving sole authority to bind the LLC to the Managing Member or its specially authorized agents. Further, the Operating Agreement plainly stated that mere status as a member did not vest with capacity to bind the LLC. Noting that the practice of stockholders running a corporation might vitiate the protections of the corporate shield, the court concluded that leaving Plaintiff and Defendant as mere members would be improper. Nor was the property management firm an appropriate substitute for a Managing Member.
The court went on to cite Maryland statutory law, noting that while judicial dissolution is appropriate only when “it is not reasonably practicable to carry on the business in conformity with the articles of organization or the operating agreement,” the statute failed to adequately define the phrase. Md. Code Ann. Corps & Assn’s Art. §4A-903 (2015). Nor had Maryland courts definitely construed the statutory language. The court therefore looked to extent to which deadlock frustrated the purpose to which the LLC was created. Finding Defendant, as prior Managing Member, had not abused its authority, unjustly enriched itself, or harmed Plaintiff’s economic interests, the court determined the business purpose of the LLC to have been faithfully fulfilled.
The court countenanced that judicial dissolution might have been appropriate but for the fact that the Operating Agreement specifically provided for arbitration as a dispute resolution mechanism. Although Defendant reversed its initial pre-trial position that appointment of a managing member was not a proper subject of arbitration, Plaintiff failed to argue that Defendant was judicially estopped from taking this position. Regardless, the court stated that because both parties’ 2014 filings had been withdrawn voluntarily prior to the instant suit, judicial estoppel would not have precluded Defendant from taking such a stance.
Finding no ambiguity in the Operating Agreement’s dispute resolution mechanism, the court deemed judicial dissolution to be unnecessary. The court went on to comment that the Operating Agreement also provided a reasonable exit mechanism in a dissenting member’s ability to exit and receive the fair value of its interest. Subject to a right of first refusal with notification requirements, Plaintiff could have solicited offers for its interest, but failed to do so. Further, Defendant in 2015 offered 50% of the appraised value of the joint venture. Finding the price to be a premium over fair market value (given the limited marketability and/or lack of controlling interest), the court was satisfied in denying the request for judicial dissolution, finding arbitration to be a fair and equitable result.
The full opinion is available in PDF.