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J.Hazelbaker
J.Hazelbaker, Attorney
Category: Legal
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Experience:  Attorney and small business owner with 10 years experience in the general practice of law.
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Arizona family LLC question: "Waiver of Action for Partition.

Resolved Question:

Arizona family LLC question: "Waiver of Action for Partition. Each Member irrevocably waives during the term of the company any right that he or she may have to maintain any action for partition with respect to the property of the company."

I'm in a family LLC of seven, which in turn is part of a larger gas and oil collective. Two of the members want out of the AZ LLC, each keeping their interest in the greater entity, of course.

Does the waiver of partition apply here? The two members may claim their 1/7 interests are already "parted;" that they just want to manage them on their own.
Submitted: 2 years ago.
Category: Legal
Expert:  J.Hazelbaker replied 2 years ago.
Hello. Thank you for using JustAnswer.

Yes. The partition waiver means that each member of the LLC has waived or given up their legal right to sue the company and have the company's property equally divided and distributed amonst the members.

Thus, unless the remaining members agree to voluntrarily split off property proportional to the member's interest, the departing member has no right to any of the company property. The can sue to force the company to buy out their interests, but they can only receive money, not property.

Please let me know what follow-up questions you have. If my above responses have been helpful, please click Accept so that I get credit for the time/effort. You may always restart the thread and ask follow-up questions at any time by clicking the “Reply” button at the bottom of the question/answer thread. You can access this thread later in your profile under the “My Questions” tab.

Customer: replied 2 years ago.
Thank you very much, but I'm still not 100% clear.... The two members wanting to be on their own may claim the limited liability company's "property" is already equally divided and distributed. (None of us expect any actual property of the larger entity, all of us already recieve just 1/7th of the money through the LLC.)
Expert:  J.Hazelbaker replied 2 years ago.
If the property is held by the LLC, then it is not already equally divided. The members of the LLC only have a right to receive their share of the profits generated by the LLC property/assets, not the property/assets themselves.

In your case, the members can insisted that they receive 1/7th of the royalties generated by leases, but they can't assert a right to 1/7 of the property or 1/7 of the lease.

Please let me know what follow-up questions you have.
Customer: replied 2 years ago.
So sorry I'm still not clear. Thank you very much for your patience. Can the two members quit the LLC and still demand their share of the money?
Expert:  J.Hazelbaker replied 2 years ago.

That depends on the terms of the Articles of Organization. These are the founding documents of the LLC and should include "withdrawal" rights and responsibilities. This is the same document that the partition waiver likely came from. Since there is a waiver of partition, the LLC very likely contains the procedure for "quiting"/withdrawing from the LLC.

So, that's where I would first look. Absent a provision, Arizona law will require the remaining members to buy out the withdrawing members interest under reasonable terms and based on fair market value. But, the withdrawing members, under no circumstances, can take actual property or assets of the LLC with them.

Customer: replied 2 years ago.

The only reference I can find to withdrawing is under Definitions "Withdrawal Event" shall mean those events and circumstances list in 29-733 of the (Arizona LLC) Act."

 

So, the withdrawing members can not keep any interest in their assets?

Expert:  J.Hazelbaker replied 2 years ago.

No. Once the assets were placed in the LLC with a waiver of partition clause, the only thing a departing member can get is money for the value of their interest. That is, they can get a sum of money equal to their 1/7 share of the company based on fair market value.
Customer: replied 2 years ago.

Still not clear, but finally, can they keep getting a sum of money equal to their 1/7th share?

Expert:  J.Hazelbaker replied 2 years ago.

Only if they remain a member of the company. Once they withdraw and get paid for their 1/7 share, the are no longer entitled to any "draw" of profits from the company.

Customer: replied 2 years ago.
Dear J, I appreciate your time and expertise, I am happy to pay you extra for your extra effort. This is my fault in not being clear with the question. The two members in question will claim they are not withdrawing, that the assets are already divided, that there is no property involved, and that they should continue to recieve their "already divided" share of money from now on. Neither would sell their 1/7th share
Expert:  J.Hazelbaker replied 2 years ago.

I believe I understand. There were property interests that were leased. Those that had the property interests formed an LLC to exploit them (thereby placing the property interests in the LLC). The LLC receives income from the leases, which is then distributed to the members of the LLC.

Two of the seven now want to go a different direction and manage their 1/7 interest in the leases themselves outside the LLC. The answer is that they can't. They put them in the LLC necessarily, and can't now take them back out due to the waiver of partition clause.

The can continue to receive a 1/7th share of the income generated by the LLC, but only as long as they are members of the LLC. Once they quit the LLC, they will no longer receive a 1/7th share. They also can't take property or leases managed/granted by the LLC with them. The only thing they can do outside the LLC is receive money for their interests.

I'm happy to continue, if this remains unclear or you feel I'm need additional facts.
J.Hazelbaker, Attorney
Category: Legal
Satisfied Customers: 4385
Experience: Attorney and small business owner with 10 years experience in the general practice of law.
J.Hazelbaker and 7 other Legal Specialists are ready to help you
Customer: replied 2 years ago.

Thank you very much! I think that covers it. I appreciate your time and expertise.

 

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J.Hazelbaker
J.Hazelbaker
1996 Satisfied Customers
Attorney and small business owner with 10 years experience in the general practice of law.