Home > Uncategorized > Closely Held Businesses: Why the Words You Use in Your Formation Documents Matter.

Closely Held Businesses: Why the Words You Use in Your Formation Documents Matter.

Another example demonstrating the significance of the words you agree to bind your business relationship.

 

On July 3rd the Michigan Supreme Court came out with an (I think) interesting Order reversing an appellate Court decision, Levine v. O’Dorisio, 299639, 2011 WL 5609825 (Mich. Ct. App. Nov. 17, 2011) rev’d, 494 Mich. 874 (2013).

 

FACTS:
The parties were two cardiothoracic surgeons in practice together. The operation of a vascular laboratory was part of the parties’ practice. The parties formed a  Professional Limited Liability Company and entered into an operating agreement in 1996; the agreement covered the parties’ entire practice, including a “vascular laboratory.”
The PLLC was dissolved in January 2004 per its operating agreement.
After the dissolution of the PLLC,  one of the owners, Levine,  sued the other owner, O’Dorisiom for specific performance of O’Dorisio’s contractual obligation to resign, and for an accounting and distribution of the PLLC’s assets.

Procedurally, this case went back and forth several times – from the trial court to the court of appeals, and finally, as of July 3rd, to the Michigan Supreme Court which granted an order reversing in part the court of appeal’s decision.

 

The owners of the company recognized that Levine received profits of approximately $1,020,000 from his continued operation of the business between: the date of dissolution AND the date of sale of the business.  The primary issues that it seems the Court of Appeals in the trial court could not agree on were regarding distribution of funds – what was included in the definition of “business assets” that were supposed to be distributed? Those profits that Levine received after dissolution, but before the sale or winding up of the business?

 

Ultimately, the Michigan Supreme Court issued an order reversing the Court Appeals in part, providing as follows:

we REVERSE that part of the Court of Appeals opinion holding that the trial court erred by failing to equally divide between the parties the profits from use of the vascular laboratory from the date of dissolution to the date of the sale of the laboratory. MCL 450.4404(5) is not applicable to this case. Instead, the division of the profits of the company are governed by the operating agreement, which provides that the PLLC “shall be dissolved” upon the occurrence of a withdrawal event. ¶ 12.1. Thus, the PLLC was dissolved on January 13, 2004, when the hospital and the defendant entered their memorandum of understanding making the defendant’s loss of staff privileges permanent. The value of the PLLC should be assessed as of that date. The defendant is not entitled to any profits derived from the plaintiff’s use of the laboratory between January 13, 2004, and the date that the laboratory was sold. Levine v. O’Dorisio, 494 Mich. 874 (2013)

RESULT:

An Operating Agreement/Bylaws/Partnership Agreement is a contract.

The Court will enforce the language that the parties agreed to.  In this instance Levine was not required to pay any amount as profits for the funds he gained using the business equipment after dissolution, but before sale.

 

LESSON:

This is another reason why it pays to hire legal counsel to draft your business partnership agreement; whether formed as an LLC or a corporation.

 

 

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