In a recent Tennessee limited liability company case, a twenty-nine percent (29%) member was awarded nearly $900,000 against the other two members of the LLCs at issue for those members’ conduct in wrongfully terminating his membership and shutting him out of the operation of the LLCs. The opinion is instructive on what is an acceptable method of valuing the financial interest of a wrongfully terminated LLC member.
Here are the key facts:
- The Plaintiff and the two Defendants were attorneys who had started several LLCs (one of which was a law firm), and all of which derived revenue from a Social Security disability practice.
- The Plaintiff owned twenty-nine percent (29%) of the LLCs; one Defendant owned thirty-nine percent (39%); and the other Defendant owned twenty-nine percent (29%).
- The opinion leaves no doubt that the Plaintiff was the member who caused the LLCs to achieve substantial profitability.
- The Defendants apparently began romantic involvement at some point after the LLCs began operating (and, after shutting the Plaintiff out, one obtained a divorce and they both announced to employees that they were a couple).
- The Defendants, before shutting out the Plaintiff, arranged meetings with key employees, told them Plaintiff would soon not be involved with the LLCs, and offered them substantial raises if they would continue to work at the LLCs.
- On April 2, 2019, the Defendants had a letter delivered to the Plaintiff notifying him that his access to all LLC bank accounts and to the LLCs computer systems had been removed, and that the police would be called if he attempted to come to work.
- After April 2, 2019, the Defendants made guaranteed payments and equity distributions to themselves, but not to Plaintiff, and made some distributions based on their having acquired some of Plaintiff’s ownership interest in the LLCs.
- The opinion indicates that the operation of the LLCs, which were owned jointly by the Plaintiff and Defendants, were not governed by operating agreements, but by several “Partnership Agreements” between the parties.
Plaintiff filed suit under causes of action for, among others, breach of fiduciary duty, breach of contract, and conversion. The trial court entered a default judgment against the Defendants on the issue of liability for discovery abuses.
To prove his damages, Plaintiff offered the testimony of an experienced business appraiser. The business appraiser testified that, through July 31, 2021, the total of value of the Plaintiff’s interest in the LLCs and of the distributions he should have received was $1,057,923. The opinion does not indicate why the appraiser chose the date of July 31, 2021. (That date was two years after Plaintiff filed suit, and about six months before trial).
The trial court awarded the Plaintiff $897,913 for the value of his interest in the LLCs and for the distributions which he should have received. There is no explanation in the opinion for why the trial court awarded $160,000 less than the amount to which the business appraiser testified.
On appeal, the Defendants argued that the trial court erred in awarding Plaintiff damages for guaranteed payments and equity distributions to which he was entitled after April 2, 2019 (the date of Plaintiff’s expulsion). Defendants argued that April 2, 2019, was the date Plaintiff’s membership interest were terminated, and, thus, he was not entitled payments or distributions after that date. The court of appeals rejected this argument. It found that no provisions in the Partnership Agreements permitted the Defendants to terminate Plaintiff’s interest in the LLCs or to expel him from the LLCs. The court of appeals further found that Defendants committed “continuing and ongoing” breaches of their fiduciary duties to Plaintiff by converting funds to their own use that should have been distributed to Plaintiff.
The Defendants also argued on appeal that the Plaintiff’s expert should not have been allowed to testify as to the fair value of the law practice, which was one of the LLCs owned by Plaintiff and Defendants. Defendants argued that his testimony should have been excluded for a number of reasons, including that the expert lacked experience valuing law practices. The court of appeals also rejected this argument. It observed that the business appraiser had valued over 1,000 businesses and approximately five law practices. If also found that the business appraiser had employed sound methodology which included considering eighteen law practice sales transactions.
For Tennessee LLC lawyers, this case may highlight an obvious result. If an LLC member is wrongfully terminated, the date of his termination is not the date on which he is no longer entitled to guaranteed payments and equity distributions. This Plaintiff was wise to file his lawsuit within one year of his expulsion as the one-year statute of limitations for breach of fiduciary duty claims might have barred any guaranteed payments and equity distributions to which he was entitled which were payable more than one year before he filed suit.