July 1, 2009
Buy or Sell Right in LLC Agreement Not Arbitrable. Gilbert Street Developers, LLC v. La Quinta Homes, LLC (Cal. App. 2009)
Gilbert Street Developers, LLC v. La Quinta Homes, LLC, 94 Cal. Rptr. 3d 918 (Cal. Ct. App. 2009) the Court was called upon to interpret two parts of an LLC's operating agreement. The agreement provided for arbitration of "[a]ny controversy or dispute arising out of or relating to this agreement or the breach thereof (exclusive of matters which are expressly within the discretion of the Members)...." 94 Cal. Rptr. at 919 n.1; Slip Op. at 2 n.1 (emphasis added). The agreement also provided that, under certain circumstances, one member could set a price, and demand that the other member buy or sell at that price. 94 Cal. Rptr. at 927-28; Slip Op. at 13-15. The question of arbitrability turned on whether the buy or sell provisions fell withing the exclusion for discretionary matters:
The Yee parties argue that there really isn‟t any discretion in the operation of the buy out agreement, other than, obviously the initial choice to invoke it. For them, it is essentially a machine that grinds to one of two inexorable results (you‟re bought out or you get bought out) once a lever is thrown.
* * *
* * * A simple binary choice as here (shall I buy or shall I sell?) qualifies under the ordinary person‟s definition of discretion as well. Discretion is simply the act of separating or distinguishing, and that includes binary choices as well as ranges.
94 Cal. Rptr. at 928; Slip Op. at 15-16.
Interestingly, the buy-or-sell provisions could only be invoked "[i]n the event of a dispute among the Members which cannot be resolved[.]" 94 Cal. Rptr. at 927; Slip Op. at 13 (emphasis added). To me, the real issue is whether arbitration would "resolve" the dispute. In any event, the agreement provided for two dispute-resolution mechanisms, and did not clearly address how they related to each other.
posted by Gary Rosin
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