Delaware LLC Operating Agreement Sets Forth the Ownership Interest

Failure to make capital contributions did not void the operating agreement or reduce the ownership interest of non-complying partners

In Grove v Brown, the Delaware Court of Chancery, relying on the unambiguous terms of a limited liability company (LLC) operating agreement, found that a member’s failure to make an initial capital contribution to a LLC did not affect that member’s ownership interest.   Further, the Court of Chancery, applying default fiduciary duties to the managing members found that two managing members breached their fiduciary duty of loyalty under the corporate opportunity doctrine.

United States Courts

Estate of Simon v. Commissioner
T.C. Memo 2013-174
July 29, 2013
Judge Thornton
United States Tax Court

Summary:

Whether the U.S. Tax Court had jurisdiction to hear a case involving a deficiency, the Commissioner of Internal Revenue assessed against a male taxpayer’s estate and his widow pertaining to a partner-level affected items proceeding under the Tax Equity and Fiscal Responsibility Act of 1982. HOLDINGS: [1]The court had jurisdiction to hear and resolve the commissioner’s decision assessing a deficiency against the taxpayers because the Internal Revenue Service (IRS) gave the taxpayers proper notice of the final partnership administrative adjustment (“FPAA”) as required by I.R.C. § 6223(a); [2]The court lacked jurisdiction to redetermine accuracy-related penalties under I.R.C. § 6662 because the deficiency procedures did not apply to the assessment of penalties determined at the partnership level, regardless of whether partner-level determinations had to be made to assess the penalty.  The court stated that it would enter an order that denied the taxpayers’ motion to dismiss the case based on their claim that the IRS did not give proper notice of the FPAA, but dismissed the case for lack of jurisdiction to the extent of the penalties that were assessed.

In re Larson
2013 Bankr. LEXIS 3348
August 16, 2013
Judge Sargis
United States Bankruptcy Court for the Eastern District of California

Summary:

HOLDINGS: [1]-The court considered the opinions and, more importantly, the methodology of the parties’ respective experts in making the necessary finding of fact concerning the value of the subject property. With reference to Fed. R. Evid. 702, 703, the court stated that such testimony would help the trier of fact to understand the evidence or to determine a fact in issue.  The first deed of trust secured the creditor’s claim in the approximate amount of $340,930.64. The creditor’s secured claim (for which the Subject Property was the collateral) was determined pursuant to 11 U.S.C.S. § 506(a) to have a value of $245,250.00, with the balance to be paid as a general unsecured claim through the bankruptcy plan.

Dept. of Transportation v. McNamara
2013 Cal. App. LEXIS 646
August 14, 2013
Judge Mihara
Court of Appeals of California

Summary:

In an eminent domain action in which appellant California Department of Transportation (DOT) took a residential property from respondent owners, the Superior Court of Monterey County (California) found that DOT was liable for precondemnation damages, granted judgment notwithstanding the verdict on the amount of precondemnation damages, and awarded litigation expenses to the owners under Code Civ. Proc., § 1250.410, subd. (b).

DOT sought review.  The court held that the owners failed to introduce substantial evidence that they were entitled to recover pre-condemnation damages. It was undisputed that the decline in their property’s value was caused solely by a market decline, not by DOT, and that DOT’s pre-condemnation conduct itself did not affect the value of the property during the pre-condemnation period. Because the owners sought pre-condemnation damages, not damages for a de facto taking, it was their burden to bear a loss in their property’s value due to a declining market prior to the date of the taking. The court observed that the trial court’s award of litigation expenses was expressly premised on its erroneous belief that DOT was liable for pre-condemnation damages. As a result, the trial court could not conclude that DOT’s final offer was unreasonable in light of the compensation awarded to the owners. The owners thus could not establish that they were entitled to an award of litigation expenses.  The court reversed the judgment and the award of litigation expenses, and directed the trial court to enter a new judgment rejecting the owners’ claim for precondemnation damages and enter a new order denying them litigation expenses.

Dreyer’s v. County of Kern
2013 Cal. App. LEXIS 621
July 22, 2013
Judge Hill
Court of Appeals of California

Summary:

Plaintiff taxpayer, the operator of a facility that produced bulk ice cream, appealed a judgment of the Superior Court of Kern County (California), which upheld a decision of an assessment appeals board in favor of defendant in the taxpayer’s action that challenged the assessment of property taxes on the equipment and personal property in its novelty ice-cream production lines.  The board found that the taxpayer was not entitled to a reduction in the value of the property, based on excess capacity or underutilization of the property, which the taxpayer claimed was the result of lack of market demand for the products produced by the equipment.

The court found that the trial court properly applied the substantial evidence standard of review because the issue before the trial court was one of fact: whether on the evidence presented, the board could appropriately conclude that the taxpayer failed to satisfy its burden of proving an underutilization adjustment. The evidence supported the board’s conclusion that the taxpayer failed to sustain its burden of proof and the trial court’s determination that substantial evidence supported the board’s decision. The taxpayer’s attempt to show excess capacity relied on annual average production figures that failed to account for seasonal fluctuations. The taxpayer presented little or no evidence that any excess capacity was due to an external cause, beyond the control of the taxpayer. The taxpayer also presented no data from the marketplace or other evidence of market demand.  The appellate court affirmed the trial court’s judgment.

Grove v. Brown
August 8, 2013
2013 Del. Ch. LEXIS 202
Judge Glasscock
Court of Chancery of Delaware

Summary:

HOLDINGS: [1]Members of a limited liability company (LLC) were deemed equal co-owners, based on the unambiguous provisions of the operating agreement (OA) and their subsequent conduct, and the failure of some members to provide required capital did not divest them of their share; [2]As the OA was silent as to how the company could merge, pursuant to Del. Code Ann. tit. 6, § 18-209(b) members who owned 50 percent of the company lacked authority to effect a merger because approval by more than 50 percent of the members was required; [3]Managing members violated their duty of loyalty by usurping the company’s business opportunities when they expanded into other areas, and they did not show that the company disclaimed its right to pursue this corporate opportunity; [4]There was no showing that family members knowingly participated in aiding and abetting that breach.  Judgment in favor of each party’s claims against the other; accounting of wrongful profits ordered. 

See http://courts.state.de.us/opinions/download.aspx?ID=193130.

[author] [author_image timthumb=’on’]http://m.c.lnkd.licdn.com/mpr/mpr/shrink_200_200/p/8/000/282/157/0812af2.jpg[/author_image] [author_info]Peter Agrapides, MBA, CVA, is shareholder of Western Valuation Advisors, a Salt Lake City-based valuation advisory firm.[/author_info] [/author]