Statutory Buyouts are NOT “Discretionary”
Many prior LLC Jungle posts have addressed statutory buyouts for LLC, partnership, and corporate interests. Some of those posts cover various efforts to defeat a pending statutory buyout through various means — dissolution of the entity, dismissal of the underlying lawsuit, etc.
This general theme was addressed again in a case recently published by California’s Second District Court of Appeal — Koenig v. Centralia Limited Investors. The Koenig opinion addressed unique facts leading to the trial court viewing the statutory buyout as “discretionary.” The Court of Appeal disagreed.
Facts: heirs inherit limited partnership interests, discover general partner shenanigans, and sue for dissolution; partnership exercises statutory buyout
Centralia Limited Investors was a limited partnership formed in 1972 for the purpose of acquiring real property in Lakewood and constructing and operating an apartment building on the property. Michael and Lauren Koenig inherited their father’s 10% limited partnership interest upon his passing.
In 2005, the certificate of limited partnership for Centralia Limited was amended and restated. The agreement confirmed Michael and Lauren Koenig’s status as limited partners in place of their father. It also stated that the partnership would continue until December 31, 2015 unless extended by the General Partner.
A further amendment occurred in 2015, whereby the term of the partnership was extended to December 31, 2060. In 2015 and again in 2019, the partnership entered into two substantial loans secured by deeds of trust on the partnership’s property.
In 2017, Michael received a letter from the partnership offering to buy out his partnership share. The letter characterized his interest as that of a mere “assignee” with no right to vote and no right to books and records, notwithstanding the 2005 certificate confirming his partnership interest.
The Koenigs investigated, and alleged that they had never received any notice of the partnership loans, prior changes to the general partner role, or the 2015 amendment, rendering those actions void. In 2018, they filed an action against the partnership and various other parties, including limited partner Proland Management Company LLC (“Proland”). The complaint included a claim for dissolution of the partnership.
Trial Court: buyout process is “discretionary” and not applicable under the facts
Proland filed an application for a statutory buyout of the Koenigs’ interests in the partnership pursuant to Corporations Code section 15908.02. The application stated that if the parties were unable to agree on the buyout price, Proland agreed to the statutory buyout procedure and agreed to post a bond in an amount determined by the court.
The Koenigs filed an opposition to the buyout motion, arguing that the buyout could not go forward because the partnership had expired in 2015.
The trial court denied Proland’s buyout motion, holding that the statutory buyout procedure was “discretionary.” The court explained that the case was “not suitable” for a buyout given the nature of the Koenigs’ claims. It also stated that “appraisers would be unable to soundly ascertain a fair market value of the subject partnership interests, while the contested allegations are pending, which could result in unpredictable findings about the partnership and its assets.”
Court of Appeal: reversed; statutory buyout is not discretionary and must be followed
The Court of Appeal reversed, holding the trial court erred in denying Proland’s motion to commence buyout proceedings.
The court first noted the mandatory language within section 15908.02, stating that upon proper application the court “shall” stay the dissolution action and proceed with the buyout process. “The usual rule with California codes is that ‘shall’ is mandatory …. Nothing in the text of section 15908.02 suggests that its use of ‘shall’ is permissive.”
The court also held that all of the statutory prerequisites were satisfied. The Koenigs’ lawsuit included a claim for dissolution of the partnership. Proland elected to purchase the Koenigs’ interests and committed to following the statutory process and to post the required bond.
The court rejected the Koenigs’ arguments that: (1) the statutory buyout procedure was predicated on an existing partnership, and therefore their claims regarding the partnership’s expiration in 2015 had to be adjudicated first; and (2) they only alleged their dissolution claim “as an alternative” to their main claim that the partnership had expired.
The court held there was “no language in the statute to support the argument that Proland was required to make a preliminary evidentiary showing before it could vindicate its statutory right to purchase” the Koenigs’ interests. The court also noted that buyout proceedings under section 15908.02 are “special proceedings,” summary in nature, and aimed at a streamlined process not subject to the normal rules of civil procedure. The Koenigs’ position was “inconsistent” with that streamlined procedure.
The court held that a plaintiff’s ability to pursue “alternative theories” until trial “does not foreclose the commencement of buyout proceedings under section 15908.02.” Here, the court noted that the Koenigs’ claim for dissolution — in which they affirmatively alleged that they were limited partners of the partnership — conceded the partnership’s continued existence. As such, the buyout proceedings did not force an “election” of theories on the Koenigs. Their claim for dissolution — whether alternatively pled or not — triggered the other partners’ option to exercise statutory buyout rights.
As to the trial court’s concern about the difficulty appraisers would have in valuing the partnership interests in light of the other claims, the Court of Appeal held that did not constitute an equitable basis for denying the buyout motion when the statutory prerequisites were satisfied.
Lesson
Under the holding of the Koenig opinion, the statutory buyout process is not discretionary. If the statutory prerequisites are satisfied, the buyout is mandatory. Further, alleging a dissolution claim “in the alternative” will not avoid the statutory buyout procedure. In light of this holding, in situations where the entity’s existence is questioned and a buyout is undesirable, it seems that a claim for Declaratory Relief would be much safer than a claim for Dissolution.
Meanwhile, the trial court’s serious concern regarding how appraisers could handle their valuation task in light of the underlying substantive claims is certainly legitimate. This issue has not been adequately addressed in case law to date.