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What are the pros and cons of using Article 17351 of California

code to dissolve an LLC? My...
What are the pros and cons of using Article 17351 of California code to dissolve an LLC?
My partner and I have few differences and I am open to resolving them.
But my partner doesnt' want to do business with me any more.
Our LLC is deadlocked (each own 50%). As per our operating agreement the only option to break up the LLC is to go for judicial dissolution under 17351.
If my partner goes with this option will this be beneficial to him?
How long would this process take? How much would it cost?
If the judge allows dissolution will I be able to prevent this?
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Answered in 2 hours by:
9/9/2013
CalAttorney2
CalAttorney2, Attorney
Category: Business Law
Satisfied Customers: 10,244
Experience: I am a businesses law attorney, with experience advising and representing owners and investors.
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William B. Esq. :

Thank you for using our service. My name is XXXXX XXXXX I would like to assist you today.

William B. Esq. :

Judicial dissolution of an LLC or other business is usually reserved as a "last resort" course of action to dissolve a business. The course of litigation takes a significant amount of money (I do not know what the value of your LLC is in relation to the expense of litigating it, but generally the cost of doing so outweighs the benefit unless you have significant equity or profits in the business. Your partner (technically the other member of the LLC) has a right to file for judicial dissolution, in the event he does so you will need to defend the action to show the value of it, and likely you will each be retaining experts to value the business, as well as arguing over the true meaning of your LLC agreement (disbursements of assets, etc.).

William B. Esq. :

If at all possible, a settlement agreement, or mediated resolution (using an experienced businessman in the same field, or a business attorney with a background in your industry) will make a far more economic use of your resources. By litigating the dissolution both of you will lose assets, by mediating the differences on valuation etc. you will each save significant amounts of money and likely come to the same division of assets (this really isn't a liability case, and unless you are trying to apportion out debt vs. income for tax purposes, it doesn't make a lot of sense to litigate these things - most parties just use the judicial dissolution as a hammer in negotiations).

William B. Esq. :

I hope the above is helpful, if you have any questions please do not hesitate to let me know and I will follow up quickly.

Thank you for using our service, please do not forget to rate my answer when you are satisfied. I am going to transfer our conversation to the "Q&A" format to ensure you can review the entire response and that I can follow up to any questions you may have quickly. I do wish you the best of luck in this matter.

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Customer reply replied 4 years ago

I have tried all means to compromise and get back to business. But my co owner is adamant and probably wants to own the whole business by trying to bully me into selling my stake at a throw away price.


 


A few more issues that I would like to bring up.


 


For the last 2 years LLC tax returns, our CPA deducted expenses instead of capitalizing them. Since I don't have much knowledge of LLC tax returns and went by whatever our CPA said, I signed the tax returns. Later on my partner went to another CPA to get a second opinion, who said that our original CPA committed several mistakes by deducting expenses. I immediately agreed to amending the tax returns. But my partner has been harassing me saying that I committed a breach of fiduciary duty by not reviewing the tax returns prepared by our original CPA. He is claiming that because of the erroneous tax returns his personal income dropped (He is a realtor and so claims he couldn't get loans due to the drop in his taxable income).


 


Can he use this against me to kick me out of the LLC?


If so, would I get opportunity to defend?


 


I am very much concerned as I have invested my lifetime savings in this project. He is now refusing to open the business with me. He went so far as to put the license on hold (this is for a preschool that we are working on).


My guess is that he is doing this to keep the market value low so that he can purchase the entire business (including real estate).


Isn't this illegal? What options do I have in this scenario?


 

He cannot "kick you out" of the LLC. You have an ownership interest in it.

Signing tax returns without understanding them may (and emphasize may) be negligent, but it is not a breach of fiduciary duty when relying upon the specialist retained by the LLC to perform the taxes. (Remember, the accountant owed a duty to the LLC, not to this other Member).

In the unlikely event that you are sued over this issue, you would have the right to defend the action (and hopefully you could defeat it in a motion to strike or some similar motion before it even got out of hand).

If the other member continues to withhold licensing or other things that make it impossible for you to do business as an LLC - he is in breach of his fiduciary duties, and that is actionable, and he is liable to the LLC for the full value of the loss.

To defend your rights, you may be forced to actually have to file a breach of fiduciary duty claim against him and hope that you are able to finance the litigation and eventually collect.

It may be worth considering making an investment in hiring an attorney to review your case and perhaps assisting you in negotiating this matter on your behalf now with a little more leverage than it seems he is bringing against you.
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Customer reply replied 4 years ago

Yes. I am seeing an attorney this week to find out what my options are.


I will try my best not to file a law suit as it makes matters worse and spoils the already worsening relationship. But at the same time, I will have to take some action if he does more harm to the business or tries to bully me on the tax issues.


 


My partner is eager to close the escrow (converting from construction loan to regular loan) but not trying to open the business. Is it possible to guess what his intentions are?

I couldn't guess at what he is doing, but if you are getting an attorney on board, perhaps you can get a negotiated resolution here before things get too much further out of hand.

I really do hope that this works out (perhaps his notions of a quickly moving on to another business opportunity will go away and the two of you can work out a real business plan (or dissolution if appropriate)).
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Customer reply replied 4 years ago

If he continues to give me headaches, I will propose to put the property on the market. This is the last resort as the business has extremely good potential (that's why he wants to go it alone).


 


I am also separately seeing business realtors (without his knowledge) to assess the market value of the property. In case he tries to purchase at a rock bottom price, I can present the proposal from my business realtor.
Since my co owner himself is a realtor, can he not agree to go with the realtor I choose who can bring a higher value? If my partner doesn't agree can I take action?


 


Just out of curiosity, how much would a judicial dissolution would cost? How long would it take? If he does this, will there be any material benefit?

The property belongs to the LLC, you are not partners - this is a distinct difference in business organization. Both members, acting with a 50% interest (this differs in other situations), have an obligation to further the ends of the LLC (not their own interests).

A dissolution of a business costs varying amounts. I really can't give you a good estimate through the forum as it has to take into account the nature of the parties, the value of the real estate, and the going rate for attorney's fees, plus various other considerations. But you can factor in a year's worth of litigation in a contested matter.
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Customer reply replied 4 years ago

Yes. I meant member when I said partner. I assume he has to listen to me if I bring in a agent who appraises at a higher value than my co owner.


In case he doesn't agree, what recourse do I have to enforce this?

Your recourse is through the Courts. You can file the same type of action (breach of fiduciary duty claim), but also file a motion for a temporary injunction at the same time to prevent the sale of the property.

CalAttorney2
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