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Corporate – LLC – Member Freeze-out – Remedy – Purchase – Valuation Date

By: S.C. Lawyers Weekly staff//June 10, 2020

Corporate – LLC – Member Freeze-out – Remedy – Purchase – Valuation Date

By: S.C. Lawyers Weekly staff//June 10, 2020

A string of emails evinces two limited liability company (LLC) members’ brazen freeze-out of the LLC’s third member. Although courts have the authority under the Limited Liability Company Act to order either the LLC or the oppressing member(s) to purchase the oppressed member’s interest in the LLC, and although the individual defendants personally engaged in the oppressive conduct that entitles plaintiff to a buyout of his interest in the LLC, we modify the trial court’s order requiring  the individual defendants to individually purchase plaintiff’s interest. Instead, the LLC itself will be primarily liable for purchasing plaintiff’s interest, with the individually defendants being secondarily liable, and in proportion to their ownership interests in the LLC.

The Court of Appeals’ opinion, which upheld the trial court’s judgment, is modified and affirmed in part and affirmed in part.

Plaintiff owned a 45 percent interest in Carolina Custom Converting, LLC (CCC); defendant Gandis also owned a 45 percent interest, and defendant Shirley owned a 10 percent interest.

Emails between Gandis and Shirley reveal their explicit scheme to oust plaintiff, and we agree with the trial court that the emails unveil their step-by-step efforts to convert plaintiff from a significant owner, with a promised $12,000 monthly compensation, to either a former owner or an employee bound by a non-compete agreement.

As it is in the corporate setting, a minority LLC member’s action for oppression is likewise an action in equity.

Gandis and Shirley both trapped plaintiff’s investment in CCC and prevented him from meaningfully participating in CCC’s operations by excluding him from many of their communications regarding CCC. When they knew they had plaintiff trapped, Gandis and Shirley presented him with unfavorable alternatives for his future with CCC; moreover, Shirley and Gandis collaborated to physically lock plaintiff out of CCC’s premises and denied him access to CCC’s financial information.

Under these circumstances, plaintiff has proven that Gandis and Shirley engaged in oppressive conduct against him.

The LLC Act grants broad judicial discretion in fashioning remedies in actions by a member of an LLC against the LLC and/or other members. Courts have the authority under the LLC Act to order either the LLC or the oppressing member(s) to purchase the oppressed member’s interest in the LLC.

Nevertheless, while we conclude Gandis and Shirley personally engaged in the requisite unconscionable and oppressive conduct to entitle plaintiff to a buyout of his interest in CCC, we modify the trial court’s order requiring Gandis and Shirley to individually purchase plaintiff’s interest, and we remand this case to the trial court for proceedings consistent with the following instructions. We first order CCC to purchase plaintiff’s interest in CCC, and Gandis and Shirley shall be obligated to purchase plaintiff’s interest only if CCC does not comply with our order that it do so. If Gandis and Shirley are required to complete the buyout, their responsibilities shall be in proportion to their respective membership interests in the LLC.

Because CCC would have sustained any financial loss caused by plaintiff’s purported actions, Gandis and Shirley lack standing to bring a breach of fiduciary duty counterclaim in their individual capacities.

S.C. Code Ann. § 33-44-702 outlines the procedure for a court to use when determining the fair value of a member’s distributional interest when that interest is to be purchased by the company. We conclude, as did the trial court, that the same approach should be employed when individual members are ordered to buy the distributional interest. However, there is little authority setting the proper date of valuing a company in a buy-out situation. In cases of minority stockholder oppression, the date of ouster seems appropriately used.

Under the facts of this case, we find the most equitable valuation date is December 31, 2011. First, as noted by the trial court, CCC, Gandis, and Shirley failed to present evidence of CCC’s then-current financial condition during the 2014 trial, partly because CCC failed to file tax returns for the 2012 and 2013 tax years. Second, Gandis and Shirley initiated an exit strategy and ousted plaintiff in January 2012; therefore, valuing CCC and plaintiff’s interest in CCC as of December 31, 2011, provides an accurate value of CCC when plaintiff was an active member of CCC with an opportunity to impact CCC’s financial condition.

Affirmed as modified and remanded.

Wilson v. Gandis (Lawyers Weekly No. 010-049-20, 26 pp.) (George James, J.) Appealed from the Circuit Court in Greenville County (D. Garrison Hill, J.) D. Randle Moody, John William Sulau, Burl Williams and Konstantine Peter Diamaduros for petitioners; Bruce Bellinger Campbell and W. Andrew Arnold for respondents. S.C. S. Ct.

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