To Moot a Statutory Buyout, LLC’s Dissolution Must be Valid Under its Operating Agreement
In 2022, The LLC Jungle covered the opinion Friend of Camden, Inc. v. Brandt in a post titled LLC Dissolution Vote Defeats Statutory Buyout. In the Friend of Camden case, the Court of Appeal held that an LLC membership vote in favor of voluntary dissolution — after a buyout motion had been filed (in response to a judicial dissolution lawsuit) but before it was ruled on — moots the judicial dissolution action and its related statutory buyout procedure.
The logic of the Friend of Camden opinion was tested in an opinion recently filed by California’s First Appellate District — The Ganz Investment Co. v. Tam Partners, L.P. While the Ganz Investment opinion is unpublished and therefore not binding precedent, it still provides a useful guidepost.
Facts: statutory buyout triggered; creative “already dissolved” argument follows
The Ganz Investment Company and Tam Partners, L.P. were each 50% members in SOMA Partners, LLC. SOMA owned a single real property assets at 201 8th Street in San Francisco. Ganz filed a lawsuit for judicial dissolution, alleging that the LLC’s management was “helplessly and irreconcilably deadlocked.”
In response to the lawsuit, Tam filed a motion to purchase Ganz’s membership interest under California Corporations Code section 17707.03. The trial court granted the motion and appointed appraisers to value Ganz’s membership interest. After the appraisers submitted initial reports to the court, Ganz filed a motion seeking to “extinguish” Tam’s buyout rights on the theory that “SOMA had already been dissolved” in accordance with the terms of its operating agreement, and the prior dissolution “trumped” the statutory buyout process.
Specifically, Ganz argued that section 9.1 of the operating agreement — which specified certain “Events of Dissolution” including the “resignation or removal of all of the Managers, when no replacement Managers are appointed” — had been triggered. The operating agreement named as Managers Robert Wolfe and Gerald Ganz, and contained typical provisions allowing the removal of any manger by a unanimous membership vote. The motion asserted that Gerald Ganz had died in December 2013, and Robert Wolfe lacked capacity (he had been appointed a guardian ad litem by a probate court). Relying on the Friend of Camden opinion, Ganz argued that dissolution was triggered under the operating agreement because the Managers had “effectively” resigned or been removed.
Trial court: Ganz’s motion denied; dissolution not triggered under operating agreement
The trial court denied Ganz’s motion, finding Ganz failed to show that any event of dissolution under the operating agreement had occurred. It held that section 9.1 of the operating agreement was not triggered “when the Managers simply cease to serve for reasons other than resignation or removal,” or “when a Manager is subject to removal by unanimous vote of the Members but has not actually been removed.”
Court of Appeal: affirmed; buyout goes forward
The Court of Appeal affirmed the trial court’s ruling. The court stated its agreement with the general principle expressed in the Friend of Camden opinion, but held “we disagree that it applies here.”
Applying basic rules of contract interpretation and looking at the operating agreement’s “plain language,” the court held that neither of the named Managers “resigned or were removed[.]” The operating agreement contained “specific procedures” governing resignation and removal, and also stated that a Manager “may not be removed except as expressly authorized in this Agreement.” While other parts of the operating agreement addressed “death or incapacity,” the Manager removal provisions did not.
The court also rejected Ganz’s argument that the default statutory rules under the Revised Uniform Limited Liability Act (RULLCA) should apply, under which a manager’s death would be treated the same as resignation or removal. The court pointed out that RULLCA states it does not apply where an operating agreement governs, and the operating agreement here was “explicit” in specifying that dissolution was triggered upon “resignation or removal of all of the Managers, when no replacement Managers are appointed” and in “identifying the procedures for such resignation and removal.” The court held that the specified procedures for resignation and removal “are not automatically completed upon the death of a Manager.”
Lesson
Under the 2022 Friend of Camden opinion, a voluntary dissolution accomplished by membership vote can moot a judicial dissolution action and its related statutory buyout procedure. But the recent Ganz Investment opinion makes clear that to effectively moot a statutory buyout, the dissolution must be valid under the terms of the LLC’s operating agreement.