Wednesday, April 27, 2016

Something Different

Virtually all of my posts have been about core real estate issues. This is not.

In the past when real estate investors needed a new entity, we routinely formed limited partnerships. There was a distinct tax advantage in doing so.

That dynamic changed when our Texas legislature amended the laws. Since limited partnerships became taxable in Texas like all other entities, lawyers shifted to forming limited liability companies as the entity of choice.

This post is about an ex-member of a Texas LLC. I hope you will find it relevant, since virtually all of the real estate entities I work with involve LLCs, and members entering and exiting.

Mark Davis was formerly a member of Highland Coryell Ranch, LLC, a Texas limited liability company. He relinquished his membership in 2005 but later wanted to inspect the books and records of the LLC.

Highland refused. Mark sued.

The trial court entered a Judgment denying Mark the right to access the books and records of Highland. Mark appealed.

Texas law is clear on this point, and allows each owner or member to examine the books and records. Mark Davis asked for a judicial interpretation that the terms “member” and “owner” relate to both present and past members and owners. Highland argued, and the trial court agreed, that those terms refer to only current members and owners.

The Texas Business Organization Code defines both terms. A member means a person who is a member or has been admitted as a member. And, an owner is a member. It seems that the trial court did not find the definitions in the TOC, or perhaps overlooked them.

With that, the Court of Appeals had little trouble reversing the Judgment of the trial court.

Mark Davis wins. Highland must cough up the books and records.

See Davis v. Highland Coryell Ranch LLC; Cause No. 07-15-00269-CV; Tex. App. Dist. 7; April 21, 2016:  

Lessons learned:

1.      There is confusion about the rights of LLC members and the ability of the members to inspect the accounts of the LLC. Those rights remain with the members even after they sell or cancel their membership interests.

2.      The right way to handle the exit of Mr. Davis should have been in a Settlement Agreement, where Mr. Davis specifically released his entitlement to inspect records of Highland. Apparently that did not happen.

3.      Another means to handle this might be to limit the rights of inspection of the members in a Company Agreement or Operating Agreement, particularly when the members are, well, no longer members. Evidently that did not happen either.
Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.