Haley and Talcott each owned
50% of a restaurant. They were organized as an LLC. They got into an
argument and Haley wanted out.
The terms of the LLC allowed
Talcott to buy out Haley. However, Haley personally co-signed for the
mortgage on the property, which meant that even if he was no longer a
co-owner, he'd still be on the hook to pay back the mortgage if the LLC
went bankrupt.
Haley sued for dissolution of the LLC.
Dissolution means that a court would order the company to
sell off all its assets, distribute the cash to the shareholders, and
then stop doing business.
Under Delaware law (Delaware
LLC Act §18-802), a court is allowed
to dissolve an LLC "whenever it is not reasonably
practicable to carry on the business in conformity with the limited
liability company agreement."
The Trial Court found for
Haley and ordered dissolution.
Talcott argued that the
terms of the LLC already allowed a mechanism for Haley to leave, and that
should be his sole option for leaving. However, the Trial Court found
that LLC agreement was improper because it left Haley holding the bag for
the mortgage. Since the LLC agreement didn't have a clause for how to
effectively deal with that problem, it was no longer "reasonably
practical" for the LLC to carry on in conformity with the LLC
agreement.
In general, an LLC is more
like a partnership than a corporation, and so the members can negotiate
any deal they want to negotiate, including limiting the ways a member
could leave the LLC.
Talcott was not out of options
if he wanted to keep the restaurant running. All he had to do was buy the
restaurant when it was offered for sale by the LLC. Then he'd own 100% of
what the LLC used to own, and he'd be on the hook for the mortgage, and
Haley would be free and clear.
