Minority Owner of Family LLC Gets a Reprieve

June 15, 2016
Kristine A. Tidgren

The Iowa Court of Appeals—while denying a minority owner’s request to have his family LLC dissolved—breathed life back into his quest to receive “fair value” for his 27% ownership interest. The court reversed a trial court order that had directed the brother to transfer his interest in the LLC to the other two owners for no consideration.

Background

The LLC was formed shortly after three siblings in 2003 inherited property from their parents. The plaintiff sisters each invested $342,041 to form the company, and the defendant brother invested $262,041. He retained $80,000 of his inheritance. As such, both sisters had a 36.46% ownership interest in the investment LLC. One sister was the managing member.

Nearly from the onset, the defendant was dissatisfied with the operation of the company. In 2007, he sent his sisters an email stating that he had never wanted to be in the LLC. He also stated that he wanted out. The brother sued the managing member in 2011 (apparently for alleged self-dealing), and the parties reached a settlement under which the operating agreement was modified to require a third-party account manager for the company’s investment portfolio. The sister, however, remained the LLC manager. The disagreements did not end in 2011; however, the brother never formally requested to exit the company.

In June of 2012, the brother emailed his sisters, protesting a proposed investment in a hog confinement. The brother proposed that he would take his land back and give the sisters cash. He stated that he did not want to be involved in the LLC anymore. “This is another loser,” he complained.

The sisters responded by asserting that they considered his emails “intent to withdraw” from the LLC. They then stated that they would follow the terms of the operating agreement, which provided that they could purchase defendant’s shares for the value of his operating account, which was zero. They went on to suggest, however, that alternatively, they would be willing to pay the defendant $150,000 to buy him out. The brother rejected the offer, stating that the amount was too low, and the sisters filed a lawsuit.

Trial Court Litigation

In their petition, the sisters sought specific performance of the terms of the operating agreement. They asked the court to compel the brother to transfer his shares to them in exchange for no consideration (since the amount in the brother’s capital account was zero). The brother filed his own counterclaim, asking the court to dissolve the LLC on an oppression theory.

The trial court sided wholly with the sisters, finding that the brother’s June of 2012 email constituted a notice of withdrawal. Thus, the court found that the operating agreement allowed the sisters to purchase the brother’s share of the company for the value of his capital account, which was zero. In other words, the company had no obligation to pay the brother anything in exchange for his LLC interest. The court granted the sisters their requested specific performance remedy, ordering the brother to transfer his shares to them in exchange for nothing. The trial court denied the brother’s request to dissolve the company and found that the operating agreement was not unconscionable, oppressive, fraudulent, or illegal. The brother timely appealed.

Iowa Court of Appeals Decision

The Iowa Court of Appeals reversed that portion of the trial court’s decision granting specific performance to the sisters. The court found that the brother’s email did not constitute a formal notice of intent to withdraw from the LLC, so as to trigger the withdrawal provisions of the operating agreement. The sisters were, therefore, not entitled to obtain the brother’s LLC interest for no consideration at this time.

That established, the court refused “at this juncture” to find the conduct of the sisters to be oppressive. Thus, the court ruled that dissolution of the company was also not warranted. The court cited Baur v. Baur Farms, Inc., 832 N.W.2d 663 (Iowa 2013) and reiterated that “every shareholder may reasonably expect to share proportionately in a corporation’s gains and when the reasonable expectation is frustrated, a shareholder-oppression claim may arise.” Oppression is proven, the court explained, “when, having the corporate financial resources to do so, [the majority owners] fail to satisfy the reasonable expectations of a minority shareholder by paying no return on shareholder equity while declining the minority shareholder’s repeated offers to sell shares for fair value.”

Here, the court ruled, the evidence did not show a situation where the sisters had declined the brother’s “repeated offers” to sell his interest for fair value. As such, no oppression had been shown. Under this fact pattern, the court was not required to engage in an in-depth Baur analysis. Finding that the brother had not issued a notice of withdrawal ended the inquiry. As such, we have no greater insight into how the court will rule on future shareholder oppression claims. This includes the Baur case itself, which is back on appeal after a 2014 trial court opinion found no minority shareholder oppression. Oral arguments took place in the appeal of the latest Baur trial court order the same day the opinion in this LLC case issued.

Conclusion

So, it’s back to the drawing board for the family LLC and the dissatisfied minority interest holder. If the siblings don’t reach a settlement, this case will no doubt be back on appeal down the road. We will keep you posted on this important topic, as future decisions issue.

The case is Morse v. Rosendahl, No. 15-0912 (Iowa Ct. App. June 15, 2016).

CALT does not provide legal advice. Any information provided on this website is not intended to be a substitute for legal services from a competent professional. CALT's work is supported by fee-based seminars and generous private gifts. Any opinions, findings, conclusions or recommendations expressed in the material contained on this website do not necessarily reflect the views of Iowa State University.

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