Never Meet Twain: Claims Don’t Improve Purchase Price in Buy-Sell Agreements | Farrell Fritz, PC

New York City’s hottest neighborhood is the landmark stone-fronted building at 66-68 Reade Street, between Broadway and Church Street. It is now marketed as a super luxury boutique condominium complex Read 66the historic building and iron columns are the most elegant part of New York City’s architectural polish.

The transformation of 66 Reade into a luxury condominium is the result of a 15-year partnership between property owner Jean Hiber and Hiber Property Manager and trusted advisor Fred Taverna. After years of apparent cooperation, a rift developed in the relationship as the parties neared the finish line. Eventually, the parties began filing lawsuits against each other, each side throwing claims and defenses at the other, and business divorce enthusiasts took notice.

With units in the building now on the market for seven figures, the first phase of the controversial debate behind the project has been completed. Manhattan Chamber of Commerce Justice Borrok Rejecting Hiber’s claim, it specifically sought to enforce Taverna’s 25% interest in the project for $40. Hieber Reade Street LLC v Taverna, directory no. 655454/2021 (NY County 2022) provides well-reasoned guidance on the conceptual separation between enforcing a purchase agreement on the one hand and defamation claims on the other.

HRS and operating agreement

In the year In 2005, Jean Hieber and Fred Taverna formed Hieber Reade Street LLC (the “Company” or “HRS”). As of 2011 Operating agreementHieber donated the property to HRS and Taverna agreed to manage and develop the property into a condominium complex with two additional floors. Invisible From the ground, to preserve the historical appearance of the building. Hieber holds a 75% membership interest in HRS, and Taverna holds 25%.

The parties anticipated that additional funds would be needed to complete the proposed conversion of the property, and the HRS operating agreement authorized Heber, as the majority member, to make a capital call by written notice, requiring Taverna to contribute its proportionate share. According to the operating agreement, if Taverna fails to pay its share in response to the capital call, any contributions made by Heber will be treated as loans to the company rather than capital contributions. Taverna had no power to make capital calls.

The Operating Agreement further provides that Taverna may involuntarily subscribe to the Capital Account if it does not contribute its share of the Capital Call:

If Taverna (a) refuses to make any additional contributions required of it pursuant to Section 4.02 and remains in effect for twenty (20) days after such notice is given; . . In the event of such circumstances, the Taverna or its legal representative may purchase Taverna by notice to take effect within one hundred and twenty days of the occurrence of such circumstances. [sic] The Company’s membership interest shall be the total of (i) the balance of the Note Account and (ii) any accrued Preferred Return.

$10 million “informal” capital contribution

From 2005 to 2019, Taverna managed the property by converting it to condominiums. Over the years, both Hyber and Taverna have made additional contributions to the company, but neither has strictly adhered to the operating agreement’s capital call provision. Instead, Taverna asked for more money when the project needed it, and he and Heber contributed disproportionately; Hieber paid more than 75% of her total contributions.

Further, while language in the operating agreement states that Hieber’s contribution to Taverna’s proportionate share of the profits is considered a loan, the parties count Taverna’s apparent contribution deficit against its capital account.

All told, according to Hieber, between 2005 and 2019, Hieber (or her successors) contributed $8.28 million to the company, and Taverna contributed approximately $2 million, resulting in a deficit of approximately $900,000 for Taverna. Since $2 million represents Taverna’s entire financial contribution, that was the balance of the capital account in 2020.

Fall, foreclosure notice and $40 sale

In the year In January 2020, Heber’s daughters (who took over the management of Heber’s interests) removed Taverna from his position as a managing director at HRS. After several months one Letter to Taverna: (i) making an additional capital call of $100,000, of which Taverna would contribute $25,000 within 15 days, and (ii) requiring Taverna to “hold fully [his] “Criminal Capital Contribution.”That isPay about $900,000 to restore the 75%/25% ratio on all contributions between 2005 and 2020.

When Taverna was unable to make the requested payment, the Hiebers sent notice that they were exercising their option to purchase Taverna’s interest in HRS. Pursuant to Section 8 of the Operating Agreement, the purchase price was to be Taverna’s capital account balance – approximately $2 million. But Hiebers found other suspected wrongdoing. As presented later complaintHiebers was interested in Taverna, and in 2019, he exposed a claim against Taverna for allegedly incompetently holding the Taverna’s contractors by fraudulently getting them to take out a $4.4 million loan.

According to this, Notice of Hybers’ Exercise of Option to Purchase Taverna Interest They pointed out that they will compensate the purchase price at the lowest price and in the alleged fault, “Section 8.01 of the Operating Agreement stipulates the purchase price . . . The minimum damages for bad faith, dishonesty and illegality—the full amount is not yet known, but will be no less than $12 million. . . It is much higher than the purchase price, so it waives the right to any payment [Taverna’s interest]He said.

When Taverna failed to show up at the closing that Hiebers had planned, Hiebers sent Taverna. Letter Enclosing four checks totaling $40 and announcing the sale of Taverna’s interest to HRS to Hybers.

Damage claims cannot cover the purchase price under the buy-sell offer

While Taverna contended that its membership interest in HRS had been sold, the Hiebers commenced an action seeking a declaratory judgment that Taverna’s interests were properly purchased pursuant to Section 8 of the Operating Agreement. of complaint Taverna also asserts causes of action for alleged misconduct in connection with Taverna’s management of the property and its conversion.

Taverna moved to dismiss the complaint. As to the claims required to enforce the discretionary sale, Taverna argued that the sale was improper insofar as it was based on a $900,000 deficit that Taverna had accumulated between 2005 and 2019. -2020, there were no capital calls following the operating agreement process, so Hybers could not claim to retain Taverna.

Judge Borok denied Hibers’ motion for a judgment to enforce the sale. The court ruled that Hybers’ attempt to purchase Taverna’s interest was void and unenforceable because Taverna was unable to pay its capital account value (approximately $2 million).

[I]In the August letter, the plaintiffs indicate that the defendants had $2 million in capital and a deficit of nearly $900,000 — meaning they should have had $2,942,856.60 in capital. In the year The plaintiffs paid the defendants only $40 when they exercised their option to purchase the $25,000 capital call in August 2020. This simply does not meet the criteria set forth in Section 8.01 of the Operating Agreement to purchase Mr. Taverna.

In other words, the Hiebers could not offset the purchase price against the value of their claim against Taverna:

The plaintiffs simply cannot evict him without paying the note bill (i.e. $2 million) and then assert only a breach of contract claim. This is not an agreement between the parties.

Accordingly, Taverna is still a member of HRS. The court dismissed the claims based on conduct that Hiebers knew about six years before the action began. Otherwise, the court refused to dismiss the Hibbers’ complaint for breach of fiduciary duty alleging misconduct while managing the property.

Defined-price purchase-sale agreements and claims for damages

Several months ago, I wrote about a case considering the intersection of tort claims between owners of closely held businesses and one owner’s efforts to enforce a mandatory buy-sell provision of the company’s shareholders’ agreement. in Estate of Connie Collins and Tab Motors of Valley Stream Corporation.No. 160529/2019 (NY County 2021) A shareholder sought specific performance of a buyout offer against certain shareholders, and the inciting shareholders sought to prevent specific performance of the sale, citing breach of fiduciary duty. Claims against their opponents. In that case, Judge Reed ruled that the buy-sell provision could be enforced separately from the damages claim: “Furthermore, although s. [breach of fiduciary duty] The court held that the claims were true, “they do not violate the buyout clause.” The buy-sell clause is still in effect.

Hieber Reade Street LLC v Taverna It highlights the same interaction. Whether or not the Hybers had a strong case for damages against Taverna, their claims failed to offset the sales price called for in the operating agreement. Like the decision of the court Tab MotorsClaims of damages – whether meritorious or not – do not affect the enforceability or terms of the purchase sale provision in the Operating Agreement. An advisor seeking to enforce a buy-sell agreement would be wise to notify you of fiduciary duty (or other bankruptcy claims) claims at the same time as prosecuting (or defending against) them.

What’s in store for HRS?

Now that the Hybers’ claim to specifically enforce the sale of the Tavern interest has been dismissed, what remains of the alleged $900,000 capital contribution deficiency? Judge Borok did not dismiss the Hibbers’ breach of contract claim because of the alleged defect, but the court expressed its doubts in a footnote.

It is undisputed that the plaintiffs were aware of the defendants’ lack of funding since 2005, not only in the new $25,000 capital call, but in all 15 of the alleged deficiencies as they attempted to justify the deficiency. There is the issue of the year notice was given and the opportunity to cure, whether or not this was excused, and whether the right to seek truth (ie, cure) was waived because of the earlier capital call. The plaintiffs may be dissatisfied with Mr. Taverna for all their alleged reasons, but they have never asked Mr. Taverna to “pay” or buy before.

We’ll see if future proceedings in this case bring the issue forward, although based on the language above, it’s not hard to imagine that Taverna Taverna will feel the upper hand in Hiebers’ bid to get the $900,000. It is said that there have been low contributions over the years.

Another interesting development: Since the decision, the Hiebers have sought to rescind their purchase option; August 12 letter They cannot afford to pay [Taverna his] At this time the balance of the note account. Is that cancellation enforceable? Not by being led Walsh v White House Post, a Delaware case where an LLC exercised its purchase rights in its operating agreement and then sought to withdraw. If Taverna is willing to buy it for $2 million, the court’s decision may have put him in the catbird seat.

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