Through a complex series of transactions, a limited liability company (LLC) owned a retail property encumbered by a construction loan. The loan was secured by capital contributions from the Defendants, members of the LLC.
The Partnership Dispute ensued after the Plaintiff failed to credit the Defendants’ contributions correctly and transferred other membership interests in violation of the LLC’s operating agreement. A court-appointed receiver was installed to oversee and help resolve the dispute.
The Plaintiff later filed Chapter 7 bankruptcy to obfuscate the incorrect accounting, thereby undervaluing the Defendants’ capital contributions. The Bankruptcy Trustee successfully sold the property and approximately $2.0 million in surplus funds remained after liabilities were met.
The litigation concerned the Bankruptcy Trustee’s distribution of the $2.0 million in surplus funds
The Plaintiff and Defendants disagreed over the value of the LLC’s capital accounts due to the Plaintiff’s accounting practices. Valuing the capital accounts was complicated by conflicting definitions of “Fair Market Value” of property in the partnership’s Operating Agreement:
- FMV = “Gross Asset Value” = any item of property contributed by a Member to the Company shall be the fair market value of such property, as mutually agreed by the contributing Member of the Company.
- FMV = Net of liabilities secured by the property.
