Lieberman v. Wyoming.com LLC

Brief Fact Summary.

Following Lieberman’s (Defendant) withdrawal from Wyoming.com LLC (Plaintiff), the LLC (Plaintiff) brought a declaratory judgment action to determine the financial consequences of his withdrawal, asserting that the LLC (Plaintiff) was obligated to pay to Lieberman (Defendant), after repaying his capital contribution, only the value of his capital account (which had a negative value), rather than, as Lieberman (Defendant) asserted, the fair market value of his equity interest (which he claimed was worth $400,000).

Synopsis of Rule of Law.

When the financial consequences of a member’s dissociation from the LLC is not addressed by the state’s LLC statute or an LLC operating agreement, a withdrawing member continues as an equity owner who is not under obligation to sell his equity interest but who cannot force the LLC to buy his equity interest.

Facts.

Lieberman (Defendant) was a member of Wyoming.com LLC (Plaintiff), credited with a 40 percent equity interest and a $20,000 capital contribution.  Following his termination as an employee, Defendant tendered his withdrawal from the LLC (Plaintiff), which the remaining members accepted.  The remaining members also decided to continue the LLC (Plaintiff), not dissolve it.  Defendant then demanded the immediate return of “his share of the current value of the company,†estimating the value of his share at $400,000, “based on a recent offer from the Majority Shareholder.â€Â  The Plaintiff offered Defendant his stated capital contribution of $20,000, but he declined to accept, claiming he was entitled to more than this amount.  The Plaintiff then brought a declaratory judgment action, and the trial court ruled that Defendant had the right to demand the return of only his stated capital contribution, $20,000, which was ordered by the court to be paid in cash.  The court also ruled that the LLC (Plaintiff) was not in a state of dissolution.  Defendant appealed, and the state’s highest court, in Lieberman I, 11 P.3d 353 (Wyo. 2000), affirmed the trial court on its dissolution ruling, but held that because the state’s LLC statute did not address the financial consequences of a member’s withdrawal, but only the withdrawal of a member’s capital contribution, Defendant was entitled to the return of his capital contribution, regardless of his status as a member of Wyoming.com (Plaintiff).  However, since Defendant expected more, the court remanded the case “because it is unclear what, became of Lieberman’s ownership or equity interest (as represented by a membership certificate)†requiring further proceedings “for a full declaration of the parties’ rights.â€Â  On remand, the trial court and the parties operated under the assumption that Defendant had withdrawn as an equity owner and that his equity interest needed to be valued and returned to him.  The Plaintiff maintained that under Wyoming.com’s (Plaintiff) operating agreement, it owed Defendant only the value of his capital account on the date of his withdrawal, which, at that time, had a negative value.  The trial court agreed and granted summary judgment to Plaintiff, ordering the liquidation of Defendant’s equity interest.  The states highest court granted review.

Issue.

When the financial consequences of a member’s dissociation from the LLC is not addressed by the state’s LLC statute or an LLC operating agreement, does a withdrawing member continue as an equity owner who is not under obligation to sell his equity interest but who cannot force the LLC to buy his equity interest?

Held.

(Golden, J.)  Yes.  (Golden, J.)  When the financial consequences of a member’s dissociation from the LLC is not addressed by the state’s LLC statute or an LLC operating agreement, a withdrawing member continues as an equity owner who is not under obligation to sell his equity interest but who cannot force the LLC to buy his equity interest.  The state LLC statute contains no provision relating to the fate of a member’s equity interest upon the member’s dissociation.  Therefore, it was totally up to the members of Wyoming.com (Plaintiff) to contractually provide for terms of dissociation.  Upon careful review of all the agreements entered into by the parties in regards to Wyoming.com (Plaintiff), it is clear that the agreements contain no provision regarding the equity interest of a dissociating member.  The provision relied on by the trial court only provides a method for distributing capital upon liquidation.  It does not contain an indication of when liquidation can or must occur, and it does not mandate a buyout or a liquidation of a member’s equity interest.  Therefore, it has no application to the immediate issue, and the trial court’s reliance upon it was misplaced.  Since no provision mandates a different result, Defendant retains his equity interest.  A member’ interest in an LLC consists of economic and non-economic interests.  These interests are distinct, and it is clear from Defendant’s notice of withdrawal that he had no intention of forfeiting his economic, or equity, interest in the company.  Defendant’s withdrawal regarded his non-economic membership interest only.  His withdrawal notice did not terminate his equity interest, and he has not forfeited his equity interest voluntarily.  There was no evidence that his membership certificate had been canceled or forfeited.  In addition, the operating agreements obviously anticipate a situation where a person could be an equity owner in Wyoming.com (Plaintiff) but not a member.  Because Defendant retains his equity interest, he is not obligated to sell his equity interest, but correspondingly, Plaintiff is under no obligation to buy his equity interest.  The parties basically admit this in their respective briefs: Defendant argues that there is nothing in the agreements that allow Plaintiff to acquire his ownership interest at less than fair market value, while Plaintiff argues that there is nothing in the agreements that require Plaintiff to pay fair market value for Defendant’s ownership interest.  Both arguments are correct.  There is simply no contractual agreement that any party must buy or sell an ownership interest for any amount.  The court will not write a buyout provision for them, and the parties are left at status quo.  Therefore, the question of valuation is moot.  The decision of the trial court liquidating Defendant’s equity interest is reversed, and the case is remanded to the trial court for a declaration of the rights of the parties consistent with this opinion.  Reversed and remanded.

Dissent.

(Lehman, J.)  While the majority is correct that there is no express provision in the operating agreements dealing with a dissociated member’s equity interest, this does not mean that the operating agreements by implication do not provide guidance as to what the parties intended when a member withdraws.  Because the agreements contemplate a member’s ability to terminate his or her membership and the remaining members’ ability to continue the business, by implication the parties must have contemplated some sort of buyout.  Plus, the LLC statutory scheme implies that, without other agreement, a member has a right to terminate his continued membership in the LLC and be compensated for this interest.  The typical LLC statutes choose to utilize partnership principles, rather than corporate principles, for exiting members, and partnership exit rules ordinarily allow for any partner to dissolve the firm at any time and demand liquidation and then be paid for his equity interest.  Because the legislature recognized this partnership rule as the norm applying in the LLC context, the implication that results is a member may terminate his membership an in LLC and must be paid for this interest unless otherwise provided.  The majority also was in error to conclude that Defendant’s withdrawal regarded his non-economic membership interest only.  The reality is that a withdrawing member does not envision that his withdrawal will result in this split in his interest.  Even though the parties themselves proceeded while assuming that Defendant had withdrawn as a member and an equity owner was entitled to be bought out, the majority refuses to provide relief for this situation.  Because the majority’s analysis could applied in the same way where a member has been expelled, the majority creates the potential for minority oppression, such as some of the members could expel a member and then refuse to negotiate for a buyout.  A remedy, therefore, should be provided.  That remedy should be the valuation of the departing member’s interest as though the company were being dissolved.  In other words, the withdrawing member’s interest, without a provision in the operating agreement otherwise, should be valued at what he would have received if the business had been dissolved on the day he terminated his membership in the LLC.  Fair market value would be a reasonable alternative estimate of the departing member’s share.  However, because the remaining members have chosen to continue the company, some consideration must be given to the duties and hardship the company may encounter as a result of paying the departing member’s equity interest—such as payment over time.  Also, until the member is paid in full, that member should still receive any distributions to which his interest is entitled, similar to a transferee without the right to participate in the management of the business.

Discussion.

The decision of the court has arguably created a situation where the remaining members may be in a position of power to dictate the terms of any negotiations for a buyout, since they are possibly now in a position to keep earnings and avoid distributions, however, as an equity owner with no say in the business, Lieberman (Defendant) would still be required to pay taxes on those earnings.  Also, without any control over his equity interest whatsoever, Defendant may be forced to take a lower buyout to avoid such negative consequences.