Dipak Patel, Plaintiff-Appellant v. Siddhi Hospitality, LLC, et al.

Plaintiff, Dipak Patel, was a 25% owner in defendants’ two entities, franchised hotels. Believing that his fellow LLC members were not treating him fairly, the plaintiff filed suit against the entities and the individual members. He asserted multiple complaints alleging various claims. The defendants filed counterclaims seeking to expel the plaintiff from the LLCs. The matters were tried in court, and all of the plaintiff’s claims were rejected. The trial court (TC) also decided that, under the terms of the LLC agreements, the other LLC members had the authority to expel the plaintiff from both Riddhi and Siddhi (the two LLCs). The Siddhi agreement required payment of book value, determined to be $409,740. Under the Riddhi operating agreement, the TC determined that the buyout was to be 25% of the fair market value of the LLC, with discounts then applied for lack of control and lack of marketability. The TC ordered a payment of $990,000. 

On appeal, the plaintiff raised seven assignments of error. The Appellate Court (AC) dismissed four with three left to be considered. The first assignment was a contention that the TC erred in allowing discounts for lack of control and lack of marketability in determining the compensation value for the plaintiff’s 25% interest in Riddhi. The defendants responded that the determination of the FMV of Riddhi was a factual determination supported by evidence in the record. The defendants also asserted that the TC acted within its equitable power to determine a fair amount. However, according to the AC, “[W]e reject defendants’ contention that, in valuing plaintiff’s share of Riddhi and Siddhi, the court engaged in a wide-ranging, equity-based evaluation of what would be ‘fair’ to compensate the plaintiff.” Clearly, the TC viewed the valuation of the plaintiff’s interest in Riddhi to be controlled by that LLC’s operating agreement, which the TC stated was “the best evidence of the expectations of any departing member.” The AC then turned to the operating agreement to see whether the TC interpreted it correctly. 

The AC stated that the operating agreement, in the court’s opinion, was unambiguous and did not provide for discounts. The expert for the defendants testified that he “believed that it was correct to apply minority and marketability discounts of 10 and 20 percent, respectively, to reflect the more limited market for the sale of a minority share in a closely held company. That had the effect of reducing the value of plaintiff’s interest by $385,000.” However, the AC agreed with the plaintiff that the operating agreement does not support the application of the discounts. Suppose under the active contract, and the plaintiff was to be compensated for the FMV of his minority interest, which would estimate what a hypothetical willing buyer would pay a hypothetical willing seller for that interest. In that case, the discounts might be appropriate. However, the operating agreement did not provide that the plaintiff be compensated for the FMV of his 25% interest. Instead, he was to be paid for the FMV of all of the assets of the LLC. There was no basis in the operating agreement for the application of discounts. The TC, therefore, erred in allowing the deals.

The plaintiff also argued that, in determining the book value of Siddhi, the TC erred in allowing a deduction for a $300,000 cash reserve. However, the AC did not accept the argument and upheld the TC. The plaintiff also argued that his interest in Siddhi should be valued at FMV and not book value. However, the AC supported the TC’s determination that the plaintiff was not forced out for oppression, and, thus, he was entitled to book value as compensation and not FMV.

The AC reversed and remanded for recalculation of the plaintiff’s compensation for Riddhi without discounts for lack of control and marketability and otherwise affirmed the TC.