Thursday, March 10, 2011

Litigation: People in LLC Houses…

Lately I have been attempting to assist two former business partners in resolving a dispute. The problem arose because one of them resigned in writing from a LLC leaving the LLC completely in the hands of the other. There can be many reasons for someone doing so:

  • The LLC is getting into murky legal waters and the person wishes to wash their hands of it to avoid being tainted with potential future problems;
  • The LLC is financially underwater (which I believe is correct in this case) and the person decides that future efforts of getting it viable is not worthwhile the effort
    • Typically, the person bailing out will form a new LLC and may pursue a similar business model.

The dispute is an interesting one because it is akin to an employee quitting a company and then turning around and demanding severance, their chair, their PC and all of the software on it that was purchased by the corporation. It appears to be a combination of a sense of over-entitlement and not understanding (or accepting) the consequences of quitting.  On the other side is the still existing corporation that is financially underwater being asked to give up assets. If the corporation does this and then files for bankruptcy(or is forced into it), the remaining manager is between a rock and a hard place to defend such an action against creditors.


There are rumors that assets of the corporation were actually removed by the resigning partner after the resignation which opens up another hornet’s nest of legal issues. The issues appear akin to an employee quitting and then claiming a corporate PC loaded with corporate software and proprietary information because of their years of service.


Unfortunately, the folks are looking like they will end up in litigation (which may result in bankruptcy of the LLC leaving just losers).


Bottom line: If you are a manager of an LLC there are some clean ways of leaving:

  • Ask the other partner to buy you out (if the LLC is not underwater)
  • Demand that the LLC be dissolved and any remaining assets distributed.
    • If underwater, put it into bankruptcy to insure a fair distribution of assets.
  • Resign and make sure you:
    • Return every piece of equipment ever issued.
    • Return all paper work and notes.
    • Delete all records and files of the LLC from all personal machines.
    • Walk away and do not look back – don’t be Lot’s Wife!
      • If the firm is bought for $10,000,000 on the next day – you are out of luck.

Not legal advise – always consult a lawyer.

1 comment:

  1. An excellent book on dealing with the dynamics and evolution of partnerships (i.e. LLC) is:
    Maxine A Rock "The marriage map: Understanding and surviving the stages of marriage" (it's cheap 2nd hand). I read it 30 years ago and found that the stages of partnerships, teams, etc follow the same human patterns as marriages.

    I just got off a 100 minute call with someone that in the "peanut gallery" of the above SOAP OPERA. Like me, he does not like or approve of it going to litigation. It was clear from the conversation that the core problem was massive failures to communicate effectively by all parties. Or should I say, communications did not match people expectations.

    After the call, I reflected and realized that the partnership was likely doomed from the start because it was a male-female partnership (not a couple). Males and Females have different styles of communications and often start with each side hearing in the other's words what they **want** to hear. Overtime this delusion crumbles with both sides feeling betrayed.

    IMHO: be very very careful about getting part of any LLC partnership with the opposite gender (unless there is at least 6 managers). The Men are from Mars versus Women from Venus communications problem will likely become very expensive over time.