Furrer v. Siegel & Rouhana, LLC

David Furrer, a partner in Siegel, Tully, Rouhana & Tully LLC, withdrew as a member after having his license suspended. A dispute arose as to the value of his 26.5% interest in the LLC. He sued the firm for compensation for his 26.5% interest in the firm and for accounting. The firm countersued for damages related to his mistreatment of client accounts. The trial court determined the value of his interest and the damages that the attorney owed the firm for his mistreatment of client accounts. The appellate court affirmed the damages but remanded the valuation of the 26.5% interest.

The Maryland Court of Special Appeals consolidated the appeals and cross-appeals into three issues, two discussed in this digest. The third dealt with the decision by the circuit court to dismiss the individual members from the complaints:

1. Did the circuit court err in awarding Furrer $84,692 as compensation for his interest in the firm?

1. “Did the trial court err or abuse its discretion in awarding the LLC $144,317.25 on its counterclaim for breach of fiduciary duty?”

The appellate court affirmed the circuit court judgment to dismiss the individual members. However, the appellate court concluded that the circuit court erred in determining the value of Furrer’s interest in the firm. 

Background.

Before withdrawing, Furrer was one of five attorney members of the LLC. He held a 26.5% interest in the LLC. The LLC did not have an operating agreement. Fees were aggregated, and profits were distributed based on the member’s interest in the LLC and not on the basis of individual production.

On Jan. 18, 2018, Furrer was indefinitely suspended from practicing law. Furrer withdrew from the firm. The remaining four members continued to operate the firm after renaming it without Furrer’s name. 

The litigation.

Furrer filed this action in January 2019, two years after his withdrawal. He also argued that the “‘fair value’ of his 26.5% interest was that percentage of the LLC’s ‘current assets’ on his ‘Withdrawal Date, including cash, accounts receivable, fixtures, etc.[,] minus its current liabilities as of the Withdrawal Date[,]’ with no discounts for ‘holding a minority interest’ or ‘lack of marketability.’”

The LLC countered with expert testimony from Bruce O’Heir, CPA/ABV, using different methods to determine the value. In the income approach, he considered historical profits and compensation structure. Under this method, he arrived at $29,150 for Furrer’s interest. Alternatively, he utilized a capitalization of earnings method, arriving at a value of $110,000.

On its counterclaim for damages, “the LLC presented evidence of damages caused by Furrer’s mishandling of the LLC’s clients and cases. Relevant to this appeal, the court considered evidence regarding Furrer’s representation of Kenneth Bing.”

Judgment on Furrer’s complaint.

The circuit court found that the firm had no written operating agreement. Furrer paid a claim out of his own funds to avoid a malpractice claim, and he withdrew from the firm after this came to light. The circuit court interpreted this as a cessation of the membership interest by agreement. The circuit court observed that the firm’s case management program had significant limitations that contributed to the difficulty in producing the type of information that Furrer had sought. “[T]he case management system did not reflect in any comprehensive way fees received on the files … handled by Mr. Furrer.”

Where a member withdraws, and the LLC continues, the withdrawing member’s interest may be redeemed for its fair value. The firm did not exercise its right to purchase Furrer’s interest after withdrawing. The circuit court considered and rejected each party’s proposed valuation of Furrer’s interest. The circuit court noted the problem with O’Heir’s value of $29,150 was that the income approach was a poor fit for valuing a law firm where personal services generate the income. “[T]he trial court found that unless and until the firm acted to either dissolve or to re-allocate Furrer’s interest in the firm, he was entitled to a 26.5 percent share of the profit of that firm.” Furrer ceased being a member of the bar in January 2018. At that date, Furrer was no longer able to receive fees from the firm. The circuit court computed the earnings of the firm during the period through 2018.

The circuit court ruled that Furrer is entitled to 26.5% of the profits generated during 2017. The circuit court determined that 100% of the profits for that year amounted to $319,594. Twenty-six and a half percent of that was $84,692. That became the “value” of Furrer’s interest. (Editor’s note: This amount was not determined by normal valuation means but resulted from the LLC’s failure to purchase Fuller’s interest, which left him as a member and entitled him to a share of profits as a substitute value. However, see below. The appellate court reversed the circuit court’s decision in this matter.)

Judgment on the LLC’s counterclaim.

“Although ‘[t]here was testimony as to a number of cases,’ the court found that ‘it boiled down to really 3 cases’ of Furrer’s ‘professional negligence’ that allegedly caused the law firm ‘to incur damages.’” The circuit court discussed each of the three cases and how they damaged the firm, noting that the Bing case created a higher level of potential liability. The circuit court ultimately determined that the proper damages to the firm related to the Bing case were $144,317.

LLC member individual liability.

The appellate court discussed and affirmed the circuit court decision that the individual LLC members were not liable, noting that the foundation of limited liability companies was to protect the individual members.

Complaint: judgment for Furrer’s economic interest.

“At the heart of this appeal is the valuation of a member’s economic interest following his withdrawal from a limited liability company with no operating agreement.” Both parties challenged the award of $84,692 as the value of Furrer’s membership interest. 

Furrer argued the circuit court should not have cut off payments of the profits at the end of 2017, and it erred in determining that Furrer’s membership terminated on the payment of the awarded amount. The LLC countered that the award was too high. Because the circuit court erred in not cutting off his membership interest as of the date, he ceased to be a member of the LLC.

The LLC had no written operating agreement, so the appellate court looked to the LLC act to fill in the terms following Furrer’s withdrawal. The circuit court ruled that, when the LLC did not exercise its right to redeem Furrer’s interest, Furrer was entitled to an ongoing 26.5% share of the profits of the firm. The appellate court agreed with the LLC that the circuit court erred in determining that Furrer was to share in profits after the date of his withdrawal. Absent a contrary agreement, a person ceases to be a member of an LLC when he or she withdraws. The appellate court determined that, once Furrer withdrew on Jan. 9, 2017, “he was no longer a member and had no membership interest in post-withdrawal profits, losses, and distributions of the LLC.” Furrer’s unredeemed interest “is limited to his 26.5% share of the fair value of assets, profits, losses, and distributions to which he was entitled on January 9, 2017.” “Because his interest must be valued at January 9, 2017, his subsequent suspension [of practicing law] does not impact the value.” The appellate court vacated the circuit court judgment on the value of the interest and remanded for reconsideration of the fair value of Furrer’s economic interest. It was remanded based on the current trial record.

Counterclaim: lost income from the Bing case.

After discussion of the facts and application of the law, the appellate court determined that “we conclude the trial court did not commit a clear factual error, err as a matter of law, or otherwise abuse its discretion in entering judgment for $144,317.25 in favor of the LLC on its counterclaim.”