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BFV Perspectives, Georgia Business Disputes, | May 16, 2013

Until Death Do Us Part: Considerations For The Death of An LLC Member

Benjamin Franklin has often been quoted for his observation that, “In this world, nothing is certain but death and taxes.” Yet, chances are, members of limited liability companies give much more thought to their taxes than to what will occur when one of the members dies.  However, there are important questions to consider:  What happens to the deceased member’s interest?  What rights do remaining members have?  What rights does the deceased member’s estate have?   Does the operating agreement address this situation?  By agreeing on terms when the parties are agreeable (and alive!) at the inception of the business relationship, many of these issues can be addressed, which can ultimately provide some level of certainty and security during the uncertain times that accompany the death of a business partner or co-owner.

Just this year, the Court of Appeals issued a decision in a case involving a dispute regarding the appraised value of the deceased member’s interest.  Davis v. VCP South, LLC,  involved an LLC that two physicians (Dr. Davis and Dr. Roth) formed for purposes of providing vein care treatment (VCP South, LLC).  Dr. Davis and Dr. Roth had formed other separate LLCs together as well.  Dr. Davis died in January 2010, and his wife was appointed administrator of his estate.

Dr. Roth, VCP South, and another one of the physicians’ limited liability companies filed suit against Dr. Davis’ estate seeking, among other things, to enforce the VCP South operating agreement regarding the purchase price of Dr. Davis’ interest.  The operating agreement authorized VCP South to use the company’s accountant to determine the purchase price of a deceased member’s interest.  Dr. Davis’s wife disputed that this provision applied, claiming it had been waived during earlier negotiations when another accounting firm appraised Dr. Davis’ interest.  Mrs. Davis also made allegations of fraud and lack of commercial reasonableness in the appraisal reached by the company accountant.

The trial court, and later the Court of Appeals, disagreed, finding no evidence to support Mrs. Davis’s allegations that the accountant’s appraisal was not done in a “commercially reasonable manner”.  The Court held that:

Where parties to a contract agree that the decision of a third person on a matter connected with the execution of a contract  shall be final and conclusive, that person’s decision is binding on the parties with respect to the matters he is authorized to determine, except in the case of fraud, gross mistake as would necessarily imply bad faith, or a failure to exercise honest judgment.

In other words, the accountant’s appraisal was binding, just as Dr. Davis and Dr. Roth agreed it would be at the outset of their business relationship.

This case is a good example of how Georgia courts routinely enforce LLC member buyout and valuation provisions.  Therefore, it is advisable for those operating an LLC to engage experienced counsel to assist in negotiating and understanding these provisions.

BFV Perspectives, Georgia Business Disputes, | May 16, 2013