Lieberman v. Wyoming. Com LLC

LEHMAN, Justice,

dissenting, with whom KITE, Justice, joins.

[420] I respectfully dissent. I agree that paragraph 6.2 of the Operating Agreement only provides a method for distributing capital upon liquidation and that the district court erred in relying on that subsection to find that Lieberman was entitled to only his *283capital contribution upon withdrawal. € 10. I also agree with the majority that a thorough review of the Operating Agreement discloses no express provision for dealing with a dissociated member's equity interest. 113 and n. 2.

[121] However, I must disagree with the majority's determination of the consequence for the failure to provide such a provision. As the majority noted in 114, we must review the contract of the parties as a whole with the goal of determining the intent of the contracting parties. The right of a member to withdraw from membership in the LLC is evidenced in the provisions of the operating agreement. Also clearly expressed is the right of the remaining members to continue the business after such a withdrawal. The provision addressing this right states:

9. Continuity. The remaining members of the LLC, providing they are two or more in number, will have the right to continue the business on the death, retirement, resignation, expulsion, bankruptey or dissolution of a member or occurrence of any other event which terminates the continued membership of a member in this LLC, in accordance with the voting provisions of the Operating Agreement of the Company.

This provision allows any member to terminate his membership in Wyoming.com by taking any of the listed actions and provides the remaining members the right to continue the business. This provision evidences the parties' intent to allow a member to completely terminate his membership in the LLC without also terminating the LLC. Hand in hand with these rights is the implication that should the remaining members elect to continue, they will have to compensate the withdrawing member for his interest in some manner. It seems intuitive that if the parties allowed for withdrawal and continuation, they must have had some intent to deal with those events. Because the provision mentions nothing of forfeiting the interest or simply becoming a non-member equity owner, the agreement to continue thus implies that there must be some sort of buyout.

[122] Furthermore, the LLC statutory scheme implies that, absent other agreement, a member has a right to terminate his continued membership in the LLC and be compensated for this interest. As we stated in Lieberman I, at 357, an LLC is a hybrid organization including characteristics of both a partnership and a corporation. At the time the legislature enacted the original LLC statutes, an important consideration was the tax ramifications of the newly created entity. At that time, in order -to obtain taxation as a partnership, an LLC could have no more than two of four corporate characteristics: limited liability, central management, free transferability of interests, and continuity of life. Franklin E. Gevurtz, Squesezs-outs and Freeze-outs in Limited Liability Companies, 73 Wash.U.L.Q. 497, 515 n. 96 (1995) (citing Rev. Rul. 93-6, 1993-1 C.B. 229). The LLC entity provided for limited Hability and central management. Therefore, to avoid corporate taxation, the typical LLC statutes choose to utilize partnership principles, rather than corporate principles, for exiting members in order to avoid the LLC having continuity of life. Id.

[123] Partnership exit rules ordinarily allow for any partner to dissolve the firm at any time and demand liquidation and accordingly be paid for his equity interest. Id. at 502. See also Wyo. Stat. Ann § 17-21-601. The legislature clearly recognized this as the normal partnership rule and impliedly endorsed such a rule by providing for an exeeption to this rule if the members agreed otherwise in their operating agreement. Wyo. Stat. Ann. § 17-15-1283. In a sense, carrying on the business following a terminating event became the exception to the general rule that the business would cease when a member left for any reason. Thus, the resulting implication is a member may terminate his membership in an LLC and must be paid for this interest unless otherwise provided.

[124] Therefore, I reach the conclusion that under the terms of the LLC as provided by the Articles of Organization and Operating Agreement, and under the statute, Lieberman could withdraw as a member of Wyoming.com resulting in a foreed buyout of his entire interest. The majority concludes, "Lieberman's withdrawal regarded his non-economic membership interest only." 115. I cannot agree with this conclusion. While a *284member's interest does in fact consist of an economic and non-economic interest, a withdrawing member does not envision that his withdrawal will result in this split in his interest. As we noted in Lieberman I, at 355-56, Lieberman demanded "his share of the current value of the company," which value he estimated at $400,000, "based on a recent offer from the Majority Shareholder." Clearly Lieberman intended to withdraw his entire interest from the LLC. As such, Lieberman essentially declared his intention to no longer be associated with the LLC. Having accepted this withdrawal, the remaining members were now required and expected to compensate Lieberman for his interest.

[125] The majority has recognized this and stated, "the parties proceeded under the assumptions that: Lisberman had withdrawn as a member and an equity owner; that he was entitled to his equity interest; and a valuation and buyout was necessary." 16. However, they now refuse to provide relief for this situation. In fact, the majority's resolution has created a situation where the remaining members are in a position of power to dictate the terms of any negotiations for a buyout. The remaining members are now conceivably in a position to retain earnings and avoid distributions, but as an equity owner Lisberman would still be required to pay taxes on those earnings. Additionally, Lieberman is no longer a member. He will not be drawing the salary of the member or controlling his equity interest in any manner. While it could be said that this situation arose because of Lieberman's withdrawal, it should be noted that under the majority's analysis the result would apply equally to an expelled member. In such an instance, some of the members could expel a member and then refuse to negotiate for a buyout. Such a result begs for the oppression of one party. While I agree with the majority that it is not our duty to write contract provisions for parties that have failed to do so, I believe it would be much worse to fail to provide a remedy.

[126] Therefore, I would provide such a remedy. Because the Operating Agreement does not provide for a valuation method, I look to the statutes to see if the legislature

provided a default valuation method. As we said in Lieberman I, express provisions for valuing a member's share when that member terminates his membership in the LLC do not exist. However, I do not believe this requires us to unilaterally create a valuation method. The statute expressly provides for the distribution of assets on dissolution. Wyo. Stat. Ann. § 17-15-126. Granted, as we stated in Lieberman I, Lieberman is not entitled to a distribution of assets upon dissolution under this section because there was no dissolution. Lieberman I, at 8358. However, this statute would be a proper valuation tool. This conclusion logically flows from the fact that the general rule is that an LLC must be dissolved upon the termination of a member's membership in the LLC, and the exception to this rule is when the operating agreement contains a provision for carrying on the business. If such a carrying on provision is not placed in the operating agreement, the members receive a distribution in conformance with the provisions of Wyo. Stat. Ann § 17-15-126. The legislature has established this as the proper method of discharging members' equity interests. I see no reason to value the departing member's share differently when the business carries on and only one member departs.

[127] Therefore, absent a provision in the operating agreement, a member's equity interest should be valued at what he would have received had the business been dissolved on the day he terminated his membership in the LLC. I recognize that, because the business is not actually dissolving, this valuation may be difficult and will have to be based to some extent on estimates and appraisals. However, a similar valuation method is used upon the dissociation of a partner from a partnership when the partnership agreement has failed to provide for a valuation method. See Wyo. Stat. Ann. §§ 17-21-603(a), 17-21-701(a), (b). Presumably, then, such estimates and appraisals are attainable.

[T28] Additionally, Wyo. Stat. Ann. § 17-15-126 provides that upon dissolution the proceeds are to be applied first to pay the creditors and then the remainder is to go to the members "in respect of their share of the profits and other compensation by way of *285income on their contributions" and then lastly to the members "in respect of their contributions to capital." As can be seen by that statute's wording, the proceeds upon dissolution are used to extinguish debt and then are used not only to return a member's capital contribution but also to provide for the member's share of profits and other compensation by way of income on that contribution. Such a provision can encompass many things including the increase in value of any assets, any retained profits, and the goodwill of the company. Therefore, fair market value, which generally accounts for these relevant factors, would be a reasonable alternative estimate of the departing member's share.1

[129] Lastly, in instances where a departing member's share is to be valued as detailed above, the remaining members have elected to continue the company. Therefore, some consideration must be given to the duties and hardship the company may encounter as a result of paying the departing member's equity interest. The whole of the LLC statutes evidences the legislature's overall concern for the protection of the LLC's creditors. See Wyo. Stat. Ann. §§ 17-15-105, -119, -120, -126 (LexisNexis 2008). It is evident that the legislature wanted to assure that the LLC's creditors were provided for before the LLC members. Wyo. Stat. Ann. §§ 17-15-120, -126. These observations lead me to conclude that the payment of the departing member's equity interest may take place over a reasonable period of time to avoid the liquidation of essential assets and the possible undercapi-talization of the LLC. To be entitled to prolong the payment over a reasonable time, the LLC must show that immediate payment in full would jeopardize the company's ability to carry on its ordinary business and provide for its creditors. Should payment over time be required, such payment should be secured by a promissory note that provides for reasonable interest. Furthermore, until the member is paid in full, that member should still receive any distributions to which his interest is entitled much like a transferee without the right to participate in the management of the business would under Wyo. Stat. Ann. § 17-15-122 (LexisNexis 2003).

. Fair market value is generally defined as the amount at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of the relevant facts. Black's Law Dictionary, 597 (6th ed.1990). See also Wyo. Stat. Ann § 39-11-101(a)(vi) (LexisNexis 2001) (defining fair market value as used for taxation purposes).