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Court Finds That Equity Trumps Buy-Sell Agreement In Company Operating Agreement

March 13, 2018

JASON S. HALLER reports that a Chancery court denied a failure-to-state-a-claim dismissal motion with regard to a retiring medical doctor’s lawsuit to force a buyout of his interest in a medical practice. 

The dispute was over the parties’ agreed method of valuation.  The Operating Agreement had a buy-sell clause that provided for a stipulated “Certificate of Agreed Value.”  But the plaintiff wanted “fair market value.” He argued that the Certificate was sixteen years old—since that time, it had been the parties’ course of conduct to utilize the fair market approach.  The Certificate pegged the value of the practice at $2.4 million.  Nonetheless, in 2009 and March 2016, the medical practice had obtained fair market valuations to assist in their business and financial planning (though not retirement planning).  The final appraisal resulted in a value of $4.45 million.


Despite the existence of these prior valuations, just 9 months later, in connection with the doctor’s retirement announcement, the practice retained yet another consulting firm to provide a fair market valuation.  This time, the value was $3.4 million.  The plaintiff, shocked at the million-dollar reduction in value, wanted his own appraisal.  In response, the remaining members demanded that he either accept the $3.4 million, or else they would sue to enforce the operating agreement’s $2.4 million valuation.


The retiring member sued under oppression, fiduciary duty, and contract theories. The defendants moved to dismiss, citing the buy-sell provision of their Operating Agreement.


The Court found that the parties’ prior course of conduct could possibly have modified the buy-sell agreement, given that it did not expressly state that modifications had to be in writing.  The Court also found that the defendants’ failure to use the “fair market value” method was potentially “oppressive” under the RULLCA, given that the parties could have developed a reasonable expectation that it would be used over the course of sixteen years.


The Court did partially dismiss the plaintiff’s “breach of fiduciary duty” claim, finding that the mere attempt to utilize the “Certificate of Agreed Value” did not implicate the defendants’ loyalty duty.  Nonetheless, the Court found that the conduct might violate a “duty of care” under an express provision of the Operating Agreement that barred “wrongful taking.”


Please contact Jason S. Haller if you have any questions or need assistance in connection with this subject.