Who says email is more efficient and cheaper than regular mail?
Not the director of the McGuire family’s real estate business after he won a lower court ruling to have it overturned on appeal last month in a ruling agreeing with his siblings that his dilutive capital calls issue, which he emailed them, was ineffective. because the current LLC agreement required that all notices be sent by first class mail.
The case and decision of the Appeal Division, Fourth Department in McGuire vs. McGuire is not as simple as it sounds. Let me explain.
According to complaint filed by three of the six McGuire siblings (referred to collectively by their first name initials, JKM) against their brother James, in the 1990s all six obtained equal stakes in a number of holding companies formed in the originated by their father who owned dozens of commercial real estate businesses as well as healthcare businesses and skilled nursing facilities. In 2006, James formed a real estate development and management company, McGuire Development Co., LLC (MDC), also equally owned by the six siblings, to manage the McGuire family’s business empire.
By agreement in 2011, James’ stake in MDC grew 5% more than the other members, reflecting his role as managing director of MDC and the other entities that make up the McGuire family business. In 2017, after one of the siblings left the MDC, James had a 24.8% stake and the other four siblings each had an 18.8% stake. Over the next two years, during which JKM negotiated with James to buy back his own interest in MDC, James made a series of capital calls under section 4.2 of the MDC Operating Agreement allowing him “from time to time” as manager to request additional contributions of capital on a pro rata basis and to dilute the member interests of members who choose not to contribute additional capital.
Here’s where things get interesting: James sent MDC Capital Call notices to his siblings via email rather than personal delivery or “first class mail, postage paid” as specified in section 12.1 ( âNoticeâ) of the operating agreement.
JKM did not provide the additional capital requested, therefore their membership interest percentages were diluted to 9.98% each, leaving James with almost 50% and the fifth brother, who worked in the company with James. , with almost 21%. JKM did not respond or take any further action regarding the capital calls except to object in mid-2019 that a capital call made earlier that year was procedurally flawed, apparently without specifying the nature of the defect.
James prevails in the lower court
JKM buyout negotiations have failed. In mid-2020, JKM brought an action against James, alleging claims for breach of contract, breach of fiduciary duty, improper dilution of their MDC member interests due to failure to properly notify and demanding accountability for MDC and the various other McGuire entities.
In September 2020, an Erie County Supreme Court judge issued summary judgment for James dismissing JKM’s claims that James violated the notice requirement of the MDC operating agreement regarding calls for capital which led to the dilution of the interests of JKM members. The court’s decision by e-mail – How relevant given the subject matter! – which was then incorporated into a formal order, found that JKM:
have waived the right to oppose the disputed notices relating to the 2018 and 2019 capital calls in question, and are barred from claiming property interests which are incompatible with those stated, among others, in the audited tax documents, so that the respective property interests are hereby determined to be: F. James McGuire: 49.3869%; Michael McGuire: 9.9803%; Kathleen M. McGuire: 9.9803%; Jeannie Marie McGuire: 9.9803%; and Jacquelyn McGuire Gurney: 20.6727%.
Court of Appeal overturns, concluding that email notice and capital appeal are potentially flawed in more ways than one
The appeals court lost a few words in concluding that under the notice of operating agreement provision, â[t]There is no doubt that the disputed 2018 and 2019 fundraising appeals were sent only by email and therefore did not strictly comply with this provision. The real dispute between the parties, the court said, is James’ assertion that JKM “waived strict adherence to the notice provision through his conduct, and therefore whether the notice by mail electronic capital calls was sufficient “.
The court opinion reviewed legal standards to find a waiver, noting that waiver requires an “intentional surrender of a known right” that cannot be inferred “from mere silence” but also that ” a waiver may be established by the parties’ conduct and actual performance “even when, as in the case of MDC’s operating agreement, the agreement contains a no-waiver clause.
The court found that in the record before it, James had failed to establish that JKM’s conduct in law constituted a waiver of the notice provision, for two reasons. First, the capital calls were made in the “unique business context” of the ongoing negotiations between JKM and James “over a takeover where [JKM] would leave the MDC. As the court further noted,
There is no doubt that the alleged February 2018 capital appeal was MDC’s very first request for a capital contribution, and therefore, there is no historical pattern of conduct that would support the conclusion that the plaintiffs have waived. the notice requirement before any of the capital calls in question. here. Further, the emails from the plaintiffs at the time of the capital calls express their surprise that MDC asked them for additional capital, despite the defendant’s participation in the ongoing buyout negotiations, and do not reflect any intention to waive the notice requirement. .
Second, the court dismissed James’ appeal of JKM’s failure to object to email notifications of capital calls for other McGuire entities, finding it “irrelevant to the waiver of the notice requirement for MDC because any waiver by complainants of a separate contract or agreement cannot be charged as a waiver of the notice requirement in MDC’s operating agreement. “
The email notice versus regular mail was not the only issue the court addressed regarding the dilution of the interests of JKM members. He also rejected James’ argument that the doctrine of fiscal estoppel precluded JKM from challenging their diluted member interests as set out in their Appendices K-1, concluding that â[i]This would distort the doctrine of fiscal estoppel beyond any recognition to conclude that applicants are prohibited from taking a position contrary to a fiscal document which they have not sworn or signed, and which has been, in done, prepared by their opponents. “
Failure to comply with the notice clause of the operating agreement? To verify. Non-waiver due to the âuniqueâ context of capital calls and other factors? To verify. Estoppel fiscal? To verify. Having lost his submission to summary judgment, with these findings, it is difficult to see how James will ultimately come out victorious on the dilution issue, especially when the court also found that his own submissions “raise questions of fact as to Whether the plaintiffs received notices of capital calls that resulted in the dilution of their membership interests, and whether the calls that were noticed by email were actually responsible for the dilution of the plaintiffs’ member interests in MDC. As the court explained:
Specifically,. . . the precise amounts, timing and method of the capital calls do not support the tribunal’s calculations regarding the plaintiffs ‘interests in MDC or the tribunal’s conclusion on the capital calls that in fact diluted the plaintiffs’ interests in MDC. For example, although the emails to the claimants regarding the capital requests were sent in February and July 2018, the respondent’s submissions establish that the dilution of the claimants’ interest in MDC did not occur until November of the same year. Further, based on the Respondent’s own submissions, the value of the Claimants’ Interest Dilution in November 2018 is not comparable to the value of the capital calls allegedly noticed in the emails dated February and July 2018. Therefore, there are factual issues as to whether the complainants had no opinion at all the call for capital which in fact resulted in the dilution of their holdings in MDC.
Always, always check and follow the notice provision
My first reaction to reading this case was how strange it is to see an operating agreement being prepared over the past two decades (at least) with a notice provision requiring delivery of all notices to be personally , or by uncertified postal mail. I saw nothing in the court ruling that any of the plaintiffs did not have and regularly used an email account, which could have explained the archaic notification provision of the MDC agreement. If I had to guess, it would be that whoever prepared the MDC operating agreement copied a form from the early days of New York LLCs in the mid-1990s, before email became the written form of communication. dominant.
Family businesses are notorious for ignoring organizational formalities. While MaGuire’s plaintiffs have never denied receiving the notices of capital calls by email and, in at least some cases, have given responses acknowledging receipt, given the importance of the capital calls and their impact unprecedented amount of stake in MDC, one would think that James did or should have consulted with a lawyer who would have reviewed the agreement and advised James to follow the notice provision to the letter. operating agreement before pulling the trigger for capital calls. James could always have emailed courtesy copies of capital calls, as well as licking envelopes and spending a few dollars on postage stamps instead of several thousand on legal fees.