Tag Archives: buy-out

Operating Agreement Drafted “with Minimal Input from Legal Counsel”

“The operating agreement that governed the Company (the ‘Operating Agreement’) was drafted by the members of the Company themselves with minimal input from legal counsel.” Brief of Respondents at 7. From this we can expect the participation of litigators will follow. Magruder v. Pauley, 2013 WL 5525832 (Mo. App. W.D. 2013) does not disappoint.

An operating agreement for an LLC, awkwardly referencing the parties as “partners”, provides for a buy-out of a withdrawing member, based on “an appraisal of the business … commissioned and paid by the company and/or remaining partners.” The trial court orders an appraisal and a buy-out on the indicated terms.

The Court hereby orders said Defendants to commission and pay for an appraisal of the company, either jointly or by causing the Company to do so, and thereafter to purchase Magruder’s share in the Company for 1/4 the appraisal value.

So, the appraiser makes a number of errors in the appraisal. The withdrawing member seeks to have them corrected; the appraiser won’t unless the withdrawing member pays. The remaining members inexplicably fail to pay. So, we have a mess.

On appeal, the withdrawing member seeks, and gets, a determination of the value of the firm and a buy-out order.

The LLC agreement contemplates recovery of attorneys’ fees. What do the remaining LLC members say about that (on p. 14 of their brief):

That provision of the Operating Agreement applies if any member of the Company obtains a judgment against another party that is a member of the Company “by reason of breach of” the Operating Agreement. … The trial court’s judgment on Appellant’s specific performance claim made no finding that the Operating Agreement was breached. The actual breach of contract claim was dismissed.

Come on. Is it plausible that an award of specific performance is not “by reason of breach of” the governing contract? Time to open the checkbook some more.

The brief also makes reference to the operating agreement not stating the time-frame in which the appraisal or the payment to the withdrawing member are to be made.  OK; fine; not drafted by counsel; whatever; a reasonable time.  Let’s move on.

The remaining members’ brief is not entirely devoid of cogent analysis.  It notes trial testimony that defendants made all required  capital contributions to the LLC, but the withdrawing member did not.  Of course, a well-drafted operating agreement would explicitly address the consequences of failure to meet a capital call.