As More LLC Members Seek a ‘Divorce’ in New York, Valuation Professionals Will Be Challenged to Value Member Interests

(White Plains, NY—March 27, 2014)… An increasing number of new businesses choose to operate as Limited Liability Companies (LLCs), which offer the protection of a corporate shield and the flexibility of a partnership. But if a conflict arises and minority LLC “members“ – the term used for LLC “partners” – are subject to acts of oppression by those in control, and the members therefore want to sever their ties with an LLC, there is no statutory provision to protect minority member interests under New York State’s Limited Liability Company Law. The minority member’s only recourse is to petition the court for dissolution of the company and attempt to establish that it is no longer reasonably practical to conduct the business – in which case the company will cease operations and its assets will be sold.  Increasingly, courts are fashioning remedies that address the concerns of minority members without requiring the termination of an ongoing business by necessitating the buyout of minority member interests.  As a result, business valuation professionals can expect to be asked to serve as expert witnesses to estimate the economic value of minority member interests.

To help valuation professionals understand how the judicial system resolves such LLC disputes, Fred D. Weinstein, Esq., a partner and chair of the Litigation Department at Kurzman Eisenberg Corbin & Lever, LLP, will present a comprehensive overview of the issue in “Filling the Statutory Void: NY Courts Give LLC Members a Way to Divorce, and Other Important Valuation Updates” at the annual Business Valuation Conference to be held May 19, 2014 at the Foundation for Accounting Education Learning Center in New York City.  The all-day conference is offered as a continuing professional education program by the New York State Society of CPAs.

The Courts’ Remedy: ‘Equitable Buyout’

Mr. Weinstein will review several landmark court cases that have helped to establish the concept of “equitable buyout” to protect the interest of minority LLC members. These cases include Mizrahi v. Cohen, 104 A.D.3d 917 (2013 NY Slip Op 02056), in which the plaintiff had carried the financial burden of a commercial property for years, and Superior Vending LLC, 71 A.D.3d 1153 (2nd Dept.2010), which required the majority member to purchase the interest of the minority member prior to the dissolution of the LLC.

“The judicial system has done an admirable job of filling the statutory void left by the LLC Law,” Mr. Weinstein says. “We expect the number of these cases will proliferate, and LLC member interest valuations will become a common part of a valuation professional’s practice. This presentation will help them become familiar with the important legal concepts involved.”

LLCs Need Well-Drafted Operating Agreements

As for business people who are part of an LLC, Mr. Weinstein emphasizes the importance of preparing a well-drafted operating agreement that provides for the rights of members who exit the LLC. Noting that New York State requires LLCs to have operating agreements, Mr. Weinstein points out that many LLCs use generic agreements that fail to cover all necessary contingencies. A well-constructed operating agreement should include terms for the dissolution of LLC and how to resolve member conflicts,” he says. “Seek the necessary legal help to develop a customized operating agreement suited to your circumstances. It will greatly reduce the risk of litigation down the road.”