Category: Operating Agreements

Peter Mahler of the FarrellFritz law firm summarizes his latest post from his New York Business Divorce website as follows:

“The Appellate Division, Second Department’s ruling last month in Berhend v. New Windsor Group, LLC illustrates the disastrous results when care is not taken by the assignee of an LLC interest to determine the validity of the assignor’s interest and the existence of transfer restrictions in the LLC’s operating agreement.”

The importance of the post to every LLC lawyer is self-evident.

Here’s the link to Peter’s post:

https://www.nybusinessdivorce.com/2020/03/articles/llcs/always-check-provenance-before-taking-an-assignment-of-llc-interest/

Peter Mahler has described his latest post in “New York Business Divorce” as follows:

This week’s New York Business Divorce highlights an interesting decision by Commercial Division Justice Andrea Masley addressing claims that the minority members of an LLC breached the operating agreement’s anti-withdrawal provisions by demanding a buyout and bringing a damages suit against the managing member.

Needless to say, the post, although it is based on a recent New York case, is likely to be of interest to LLC lawyers in many jurisdictions.

The link to the post is:  https://www.nybusinessdivorce.com/2020/01/articles/llcs/a-case-of-llc-withdrawal-symptoms/

The new post by Peter Mahler under the link below provides a powerful illustration of the importance of avoiding ambiguity in multi-member LLC operating agreements—and of how difficult it can be to avoid this ambiguity.

https://www.nybusinessdivorce.com/

Below is a link to the latest post by Peter Mahler in his marvelous New York Business Divorce blawg.  It’s about a defective operating agreement between two equal members of a realty holding company.  It contains lessons for all of us.

Here’s the link:  https://www.nybusinessdivorce.com/2019/11/articles/operating-agreement/operating-agreement-spawns-multiple-disputes-between-50-50-members-of-realty-holding-llc/

The attached excellent new post by Peter Mahler, based on a very recent New York case, describes the very scary legal and  persons consequences that can arise when members of a multi-member LLC fail to define adequately in their operating agreement the circumstances in which the members’ rights to share in LLC profits will change because of changing circumstances.

https://www.nybusinessdivorce.com/2019/10/articles/operating-agreement/the-perils-of-indeterminate-llc-membership-interests/

 

The new post under the link below discusses a Delaware Court of Chancery case that, in essence, upholds, despite traditional equitable considerations, LLC agreement terms providing that certain types of transfers of membership rights will be “null and void.”  The issue addressed in the case lurks in many LLC operating agreements not only under the Delaware Limited Liability Company Act but under many other LLC acts.

Here’s the link:

https://www.klgatesdelawaredocket.com/2019/07/chancery-court-finds-that-language-in-an-llc-agreement-that-states-an-assignment-is-null-and-void-trumps-the-common-law-and-renders-equitable-defenses-ineffective/

Peter Mahler introduces the post below as follows:

“Half-Baked LLC Agreement Yields Improvised Valuation Decision”
By Peter Mahler

A rudimentary, “de facto” operating agreement with a cryptic withdrawal/buyout provision predictably set the stage for a unique valuation contest in the Delaware case highlighted in this week’s New York Business Divorce. Continue Reading…”

In connection with a February seminar on real estate transactions, the American Law Institute has published a very good model LLC agreement.  Among its other virtues, the tables of contents of the agreement provide an excellent checklist of the issues that LLC lawyers should consider addressing in LLC agreements they are planning and drafting for their clients.  The title page and tables of contents of the ALI agreement are below:

SA004 ALI-CLE 175
The American Law Institute Continuing Legal Education
ALI-CLE Course Materials
February 6 – 8, 2019
Modern Real Estate Transactions 2019
LIMITED LIABILITY COMPANY AGREEMENT
David Barksdale
Loeb & Loeb LLP
Los Angeles, California
Copyright (c) 2019 The American Law Institute; David Barksdale

LIMITED LIABILITY COMPANY AGREEMENT

OF

____________________,

a Delaware limited liability company

Dated as of _______________

TABLE OF CONTENTS

ARTICLE I DEFINITIONS

1.1 Definitions

1.2 Construction; Incorporation of Recitals

1.3 Interpretation

ARTICLE II GENERAL PROVISIONS

2.1 Formation of Company

2.2 Term

2.3 Purpose

2.4 Place of Business; Registered Office and Agent

2.5 Nature of Members’ Interests

2.6 Title to Company Property

2.7 Intentionally Omitted

2.8 Developer Member Representations and Warranties

2.9 Investor Member Representations and Warranties

2.10 Developer Investment Document [and Investor Sponsor Guaranty Obligations]

2.11 Transfer of Development Approvals

2.12 Initial Funding Conditions

2.13 Closing Costs

2.14 Indemnity by Developer Member

2.15 Verification

2.16 Subsidiaries

ARTICLE III CAPITAL CONTRIBUTIONS; LOANS

3.1 Capital Accounts

3.2 Pre-Development Contributions; Acquisition Capital Contributions

3.3 Additional Capital Contributions Upon Commencement of Operations

3.4 Failure to Make a Pre-Development Contribution or any Additional Capital Contribution

3.5 Construction Capital Contributions; Investor Member Construction Priority Capital Contributions

3.6 Conditions to Closing under Purchase Agreement and Commencement of the Project Work

3.7 Intentionally Omitted

3.8 Publicity

3.9 Intentionally Omitted

3.10 Intentionally Omitted

3.11 [Financing Options; Financing Termination Option

3.12 Termination Option

ARTICLE IV MANAGEMENT OF THE COMPANY

4.1 General

4.2 Major Decisions

4.3 Duties and Responsibilities of the Managing Member

4.4 Rights Not Assignable, etc

4.5 Development Agreement, Property Management and Leasing Agreement

4.6 Concerning Investor Member

4.7 Authority

4.8 Designated Representatives

4.9 Leases and Compliance with Leases

4.10 Environmental Responsibility

4.11 SPE Covenant

4.12 Third Party Financing

4.13 Guaranties

4.14 Assignment of Purchase Agreement

ARTICLE V DISTRIBUTIONS AND ALLOCATIONS

5.1 Distributions of Net Cash Flow and Net Capital Proceeds

5.2 [Tax Advances

5.3 Net Income and Net Loss

5.4 Regulatory Allocations

5.5 Intentionally Omitted

5.6 Allocations in Connection with the Liquidation of the Company

5.7 Tax Allocations; Section 704(c)

ARTICLE VI BOOKS AND RECORDS; TAX MATTERS

6.1 Accounting

6.2 Company Funds

6.3 Statements and Budgets

6.4 Inspection

6.5 Tax Matters

6.6 Tax Matters Representative

6.7 Noncompliance

6.8 Appraisals

6.9 Tax Service

6.10 Legal Fees

6.11 Developer Member and Affiliate Expenses

6.12 Credit Reports and Other Information

ARTICLE VII TRANSFER OF COMPANY INTERESTS; WITHDRAWAL OF MEMBERS

7.1 Transfer of Developer Member’s Interest

7.2 Transfer of Investor Member’s Interest

7.3 Bankruptcy

7.4 Waivers

7.5 Expenses

7.6 Withdrawal of Members

7.7 Compliance with Loan Documents

ARTICLE VIII SALE OF PROPERTY; DEADLOCK; BUY/SELL OFFER

8.1 Limitations on Exercise

8.2 Buy/Sell Offer

8.3 Additional Limitations on Exercise

8.4 Closing of Buy/Sell Offer

8.5 Investor Member Right to Initiate a IM Forced Sale Right

8.6 Investor Member Forced Sale Right

8.7 Closing of IM Forced Sale

8.8 DM Put Option

8.9 Reciprocal Put Option

8.10 Closing of Reciprocal Put Option

ARTICLE IX INSURANCE

9.1 Coverage

9.2 Insurance During Any Period of Construction, Repair, Restoration or Replacement

9.3 Evidence of Insurance; Notices

9.4 Concerning Liability Insurance

9.5 Miscellaneous Insurance Matters

9.6 Insurers

9.7 Contravention of Insurance

9.8 Waiver of Subrogation

9.9 Coordination with Loan Requirements

ARTICLE X DISSOLUTION AND TERMINATION

10.1 Dissolution

10.2 Appointment of Liquidating Member

10.3 Distributions and Other Matters

10.4 Distributions of Property

10.5 Actions of the Liquidating Member; Statements of Account; Certificates of Cancellation

ARTICLE XI DEFAULT

11.1 Defaults and Remedies

11.2 Removal of Developer Member as Managing Member

ARTICLE XII [INTENTIONALLY OMITTED]

ARTICLE XIII NOTICES

13.1 Notices

13.2 Change of Address

ARTICLE XIV MISCELLANEOUS

14.1 Indemnification

14.2 Intentionally Omitted

14.3 Estoppel Certificates

14.4 Remedies

14.5 Partial Invalidity

14.6 Governing Law; Successors

14.7 Amendment

14.8 Execution in Counterparts

14.9 Computation of Time

14.10 Titles and Captions

14.11 Independent Ventures

14.12 Employees

14.13 Intentionally Omitted

14.14 Prohibited Payments

14.15 Entire Agreement

14.16 Demands, Capital Calls, Notices, Consents and Approvals

14.17 Meetings

14.18 Preamble

14.19 No Brokers

14.20 Waiver Of Jury Trial

14.21 Attorneys’ Fees/Prevailing Party

14.22 Waiver of Partition

14.23 Limited Liability

14.24 Confidentiality

INDEX TO ADDENDA

Addendum A: Construction Capital Funding Addendum

INDEX TO EXHIBITS

Exhibit A: Form of Assignment and Assumption Agreement

Exhibit B: Schedule of Pre-Development Contribution Amounts and Maximum Capital Contributions

Exhibit C: Schedule of Environmental Audits

Exhibit D: Legal Description of Land

Exhibit E: Initial Leasing Guidelines

Exhibit F: Schedule of Permitted Encumbrances

Exhibit G: Pre-Development Budget

Exhibit H: Preliminary Project Budget

Exhibit I: Preliminary Project Plans and Specifications

Exhibit J: Developer Member Organizational Chart

Exhibit K: Other Personal Property

Exhibit L: Example of Dilution Calculation

Exhibit M: Preliminary Financing Guidelines

Exhibit N: Sample Calculation of Investor Return Multiple

Exhibit O: Reporting Requirement

Exhibit P: Sample Calculation of Straight Split

Exhibit Q: Straight Split Modifications

Exhibit R: CI Modifications

Exhibit S: Project Costs Incurred

Exhibit T: Development Approvals

Exhibit U: Design Professionals Fees

Exhibit V: Pre-Development Requisition Forms

Exhibit W: Construction Requisition Forms

Exhibit X: Final Lien Waivers

The attached post from Tom Rutledge, a leading U.S. LLC scholar and practitioner, addresses an interesting Pennsylvania case about the validity of certain types of votes by majority members of a multi-member LLCs.

https://kentuckybusinessentitylaw.blogspot.com/2019/02/except-as-otherwise-provided.html

Operating agreements for multi-member LLCs often contain non-competition provisions.  Massachusetts lawyers who draft these agreements or who draft non-Massachusetts operating agreements intended to be effective in Massachusetts should be aware of Massachusetts’ new and stringent statutory restrictions on non-competition agreements. These restrictions undoubtedly apply to non-competition provisions in operating agreement. For an excellent overview of the new Massachusetts statute, click here: https://www.ebglaw.com/news/massachusetts-passes-new-law-governing-non-competition-agreements/