LLC Dissolution Vote Defeats Statutory Buyout
Several prior LLC Jungle posts have explored the statutory buyout procedures established by California Corporations Code section 17703.03 and related statutes:
Under section 17703.03, if a member of the LLC sues for judicial dissolution, the other members of the LLC may avoid the dissolution by triggering a buyout of the plaintiff’s membership interest. Under section 17703.03(c)(6), a plaintiff in a judicial dissolution action cannot thwart a defendant’s exercise of the statutory buyout by simply dismissing the case.
In an opinion recently published by California’s Second Appellate District — Friend of Camden, Inc. v. Brandt — the Court of Appeal addressed the impact of a membership vote for voluntary dissolution pursuant to an LLC’s operating agreement after a statutory buyout process had already been initiated.
Facts: plaintiff LLC member sues for judicial dissolution; defendants trigger statutory buyout; plaintiff and other members vote for dissolution
The plaintiff, Friend of Camden, Inc., held a 1 percent membership interest in Ventura-Petit East LLC, which owned and managed an income-producing commercial office building. Other members of the LLC affiliated with Friend of Camden owned another 49% of the membership interests. Collectively known as the “Shapiro parties,” this group owned 50% of the LLC.
The defendants (collectively known as the “Brandt parties”) owned the other 50% of the LLC.
For years, the Shapiro parties and the Brandt parties disagreed over whether to sell the commercial building. The Shapiro parties were in favor of selling, but could not obtain the approval of more than 50% of the membership as required by the LLC’s operating agreement.
As a result of this deadlock, plaintiff filed a lawsuit seeking a decree of judicial dissolution.
Trial court: after statutory buyout triggered, buyout must proceed notwithstanding a vote for voluntary dissolution
In response to the judicial dissolution action, the Brandt parties filed a motion exercising their buyout rights under section 17707.03.
Before the buyout process moved forward with the appointment of appraisers, the Shapiro parties voted their collective 50% interest in favor of a voluntary dissolution of the LLC. Under Corporations Code section 17707.01(b), unless the operating agreement says otherwise, 50 percent or more of the members may vote to dissolve the LLC.
The Brandt parties argued that the buyout process, once exercised, was “mandatory” and could not be avoided by a vote to voluntarily dissolve the LLC. In contrast, the Shapiro parties argued that the trial court “lacked jurisdiction” to enforce the buyout because in light of the voluntary dissolution vote, the LLC was already dissolved.
The trial court agreed with the Brandt parties, and issued an order staying the action and directing the appointment of appraisers to determine the buyout price.
The Shapiro parties appealed, and obtained an appellate stay of the buyout pursuant to a writ of supersedeas.
Court of Appeal: reversed; vote for voluntary dissolution was effective and defeated the buyout
The Court of Appeal sided with the Shapiro parties and reversed the trial court’s buyout order.
The court based its holding on the plain language of section 17707.01(b), holding: “The statute states unequivocally that an LLC ‘is dissolved, and its activities shall be wound up, upon the first to occur’ of the events listed, one of which is a vote to dissolve.” The court continued: “we see nothing in the statute or other law to suggest that the mere filing of a buyout motion somehow operated to prevent members from voting to dissolve the LLC. … Under the statute, the LLC was dissolved in accordance with that vote, and its activities are now required to be wound up.”
The court rejected the Brandt parties’ argument that the Shapiro parties were not allowed to vote to dissolve after the buyout motion was filed. The court held: “the vote to dissolve effectively circumvented the buyout procedure. Section 17707.01 expressly permits a vote to dissolve, and such a vote effectively moots a judicial dissolution proceeding and any ensuing buyout proceeding. Defendants present no authority to support their assertions that such a vote is in any way improper. There is none.”
Under the holding of the Friend of Camden case, a vote in favor of voluntary dissolution moots a judicial dissolution action and its related statutory buyout procedure.