ILLINOIS STATE BAR ASSOCIATION OCTOBER 2018 VOL 65 NO. 4 Trial Briefs The newsletter of the Illinois State Bar Association’s Section on Civil Practice & Procedure What is the valuation standard for valuation of a minority interest in an Illinois LLC?

BY GEORGE BELLAS & JILLIAN TATTERSALL

When a minority interest holder leaves subdivision (4) or (5) of subsection fraudulent conduct by the LLC’s managers an Illinois limited liability company, (a), the court may order a remedy or controlling members.17 determining the value of that former other than dissolution including, The 2017 ILLCA amendments abolished member’s share presents counsel and courts but not limited to, a buyout of the the prior provisions for purchasing the with questions of methodology. The issue applicant’s membership interest.16 interest of a minority member. The ILLCA usually centers around whether to apply In other words, the ILLCA now formerly provided that “a limited liability a discount for the minority interest value. specifically provides that a court may order company shall purchase a distributional Changes to the Illinois LLC Act15 in 2017 a buyout of an applicant’s membership interest of a member for its fair value.”18 clarify the matter: interest when the applicant petitions for Continued on next page In a proceeding under relief due to alleged illegal, oppressive, or Snow and ice: Natural and obvious?

BY JASON G. SCHUTTE

Here in Illinois, winter weather such sno, which created the conditions causing common defenses to premises liability as snow and freezing rain, often create their fall. As a general rule, the natural claims, the open and obvious doctrine, conditions that lead to slips and falls by accumulation defense provides very good when evaluating these claims. patrons of businesses, invitees to personal protection to property owners in Illinois, The application of the open and residences or members of the general and inevitably, their liability insurers. obvious condition doctrine was recently public. These slips/falls inevitably lead to There are situations where the analyzed in the Fourth District Appellate personal injury claims and lawsuits. property owner does create an case Winters v. Mimglii Arbors at Eastland, The most common, go-to defense unnatural accumulation of snow and the LLC. against theses type of claims involving aforementioned natural accumulation snow and ice is the argument that the defense cannot be utilized to defeat the Facts of the Case injured party slipped or fell over a “natural plaintiff’s claim; however, that does not In Winters, the plaintiff claimed that accumulation” of snow/ice. The injured mean that the property owner is without he slipped on an unnatural accumulation party inevitably argues that the property defenses to the personal injury claim. of snow at the apartment complex where owner acted in some fashion so as to create Oftentimes, attorneys, property owners he resided.1 He asserted that in January an “unnatural accumulation” of ice or and insurers may overlook one of the most of 2014, Defendant Changing Seasons Continued on page 3 Trial Briefs ▼ OCTOBER 2018 / VOL 65 / NO. 4

What is the valuation standard for valuation of a minority interest in an Illinois LLC? Trial Briefs

CONTINUED FROM PAGE 1 This is the newsletter of the ISBA’s Section on Civil Practice & Procedure. Section newsletters are free to section members and published at least four The court shall “determine the fair value of marketability.” The court may times per year. Section membership of the distributional interest.”19 When also appoint an appraiser and, if dues are $30 per year. To subscribe, visit www.isba.org/sections or call 217-525- determining the fair value of the interest, this is done, it is important that 1760. the court would consider, among other the appraiser understand the OFFICE relevant evidence, the “going concern value difference between a “fair market ILLINOIS BAR CENTER of the company.”20 These provisions no value” standard of value and a “fair 424 S. SECOND STREET SPRINGFIELD, IL 62701 longer exist. value” standard of value. The court PHONES: 217-525-1760 OR 800-252-8908 So, how does a court value the interest shall also take into account any WWW.ISBA.ORG of a departing member who qualifies for a legal constraints on the ability of EDITOR James J. Ayres judicial ordered buyout? the LLC to purchase the interest.21 PUBLICATIONS MANAGER In Lincoln Provision, Inc. v. Puretz, 775 The ILLCA does not provide a definition Sara Anderson F.3d 1011 (2015), the United States Court of for the fair value of a distributional  [email protected] Appeals for the Eighth Circuit determined interest, nor is there any case law directly CIVIL PRACTICE & PROCEDURE SECTION COUNCIL that the ILLCA instructs courts on the interpreting “fair value” in relation to the Hon. Barbara L. Crowder, Chair value of a dissociating member of an LLC distributional interests of LLC members. Ronald D. Menna, Jr., Vice-Chair Sara Morgan Davis, Secretary distributional interest. When determining Other courts also provide very little Matthew Pfeiffer, Ex-Officio Vincent Joseph Arrigo the value of the member’s interest, the authority regarding how this “fair value” James J. Ayres, Newsletter Editor George S. Bellas “court must calculate the fair value of should be applied under the ILLCA. The Ryan A. Biller the interest after taking into account all use of the term “fair value” by the Illinois Catherine R. Brukalo Ashley D. Davis ‘relevant evidence,’ including, for example, Business Corporation Act (“IBCA”), Kimberly A. Davis Hon. Eugene G. Doherty the value of the LLC as a going concern and however, provides some insight. Hon. Richard P. Goldenhersh Robert H. Hanaford, CLE Coordinator any agreement between the members Under the IBCA, fair value “means the Robert Handley fixing the price or specifying a formula proportionate interest of the shareholder Candace D. Hansford James S. Harkness for calculating the price of a distributional in the corporation, without discount for Khalid J. Hasan John J. Holevas interest in the LLC.” The court further minority status or, absent extraordinary David P. Huber 22 Allison M. Huntley stated, “an LLC’s operating agreement circumstance, lack of marketability.” This Mark L. Karno governs relations among the members, but IBCA clarification can serve as a basis for Patrick M. Kinnally Stephen M. Komie to the extent the operating agreement does determining the fair value of a departing Emily N. Masalski Hon. Mike P. McCuskey not otherwise provide, the ILLCA governs Illinois LLC member’s minority interest. Hon. Brian R. McKillip those relations.” In addition, the court This is consistent with the interpretation of Gregory Edward Moredock Hon. Leonard Murray noted that principles of law and equity a majority of courts throughout the country Omar S. Odland Prof. Jeffrey A. Parness supplement the ILLCA. that have held that neither liquidity nor Steve G. Pietrick Bradley N. Pollock The volumes dedicated to Business minority discounts are permissible in fair Dan Steven Porter Organizations found in the Illinois Practice value proceedings. James Michael Ruppert Gary L. Schlesinger Series further support this interpretation of Historically, Illinois courts have Nigel S. Smith Rick L. Turner, Jr. the ILLCA stating: been inconsistent on the applicability of Carlos A. Vera David A. Weder In determining the fair discounts to fair value determinations. Hon. Russell W. Hartigan, Board Liaison value of the interest, the court While the Illinois Supreme Court has Shawn S. Kasserman, Board Liaison Blake Howard, Staff Liaison is instructed to consider discouraged the use of discounts in fair Timothy J. Storm, CLE Committee Liaison the going concern value of the value determinations, they have also left LLC. This is consistent with the their application to the discretion of the DISCLAIMER: This newsletter is for subscribers’ personal use only; redistribution is prohibited. Copyright Illinois State Bar legislation referenced above which trial courts.23 Association. Statements or expressions of opinion appearing herein are those of the authors and not necessarily those of speaks of the “proportionate Conversely, Illinois appellate courts the Association or Editors, and likewise the publication of any advertisement is not to be construed as an endorsement of the interest of the shareholder in the have repeatedly allowed discounts to affect product or service offered unless it is specifically stated in the ad corporation, without any discount fair value determinations.24 These Illinois that there is such approval or endorsement. Articles are prepared as an educational service to members of for minority status or, absent appellate court cases conflict with the ISBA. They should not be relied upon as a substitute for individual extraordinary circumstances, lack national trend that “neither liquidity nor legal research. The articles in this newsletter are not intended to be used and may not be relied on for penalty avoidance.

2 minority discounts are permissible in fair In Brynwood Co. v. Schweisberger, 25 1. Public Act 99-0637 went into effect on July 1, value proceedings.” Recent Illinois law, 393 Ill.App.3d 339 (2009), the court held 2017 and dramatically changed the provisions re- however, has begun to follow the national that the “term ‘fair value’ require[s] the garding the buyout of a minority member. 805 trend of disallowing minority discounts trial court to value the dissenting shares ILCS 180/35-1, et seq. 2. 805 ILCS 180/35-1(b). when interpreting fair value. In addition, the by looking at what they represent – a 3. 805 ILCS 180/35-1(a)(5). Illinois legislature addressed the historically percentage ownership in the intrinsic value 4. 805 ILCS 180/35-60(a). divided Illinois courts’ decisions on the of the corporation as a going concern.” 5. Id. 6. 805 ILCS 180/35-65(a)(1). applicability of fair value by amending the Although the court in Brynwood interpreted 7. Charles W. Murdock, Illinois Business Orga- IBCA in 2007 to mirror the American Law the definition of fair value prior to the nizations § 5.17 (2d. ed. 2016)(citing 805 ILCS 26 5/12.56(e)). Institute’s definition of fair value. 2007 IBCA, the holding reflects Illinois’s 8. 805 ILCS 5/11.70(j)(1). By prohibiting the use of minority movement towards the national majority 9. Stanton v. Republic Bank of S. Chi., 581 shareholder discounts in a fair value definition of fair value. Following this N.E.2d 678 (Ill. 1991). 10. See, e.g., Weigel Broadcasting Co. v. Smith, determination, Illinois law now accurately trend towards the prohibition of minority 682 N.E.2d 745, 750 (I11. App. Ct. 1st Dist. reflects the prevailing national treatment of deductions when determining fair value, the 1996); Institutional Equipment & Interiors, Inc. v. Hughes, 562 N.E.2d 662, 667-68 (Ill. App. minority discounts. A minority discount provisions found in §60-70 of the ILLCA, Ct. 2d Dist. 1990). Independence Tube Corp. v. adjustment is based on the theory that which allow for the court’s determination Levine, 535 N.E.2d 927 (Ill. App. Ct. 1st. Dist. non-controlling shares are not worth their of fair value, were repealed effective July 1, 1988) (finding that in a closely held corpora- tion, the “minority interest factor” and the “lack proportionate share of the company’s value 2017. of marketability” are intrinsic factors to use for because they lack voting power to control Although Illinois has historically allowed evaluation purposes even when the real buyer is 27 the corporation). corporate actions. When applied to third fair value to be adjusted by minority 11. Charles W. Murdock, Squeeze-outs, Freeze- parties, the discount is proper because the discounts, recent trends and changes in outs and Discounts: Why is Illinois in the Minor- third party does not gain a right to control Illinois law demonstrate a movement ity in Protecting Shareholder Interests, 35 Loy. 28 U. Chi. L.J. 737 (2004), reprinted 47 Corporate or manage the corporation. Conversely, towards the national prohibition of minority Practice Commentator 547 (2005). when applied to other shareholders, or the discounts when determining fair value. 12. Principles of Corp. Governance § 7.22 corporation itself, the interests of those Although not specifically defined under (1994). 13. Derek P. Usman, Minority Shareholders already in control increases, resulting in the ILLCA, Illinois courts and statutes Receive a Christmas Gift from the Governor, Us- a windfall to buyers.29 This theory easily have taken the position of prohibiting the man L. Blog (Apr. 2009) http://dusmanlaw.com/ wp-content/uploads/2009/04/usmancorparticle. applies to the membership interest of an LLC application of minority discounts when pdf. where the dissociating member’s interest is determining fair value in strikingly similar 14. Id. being purchased by the remaining members corporate circumstances. n 15. Id. of an LLC. Snow and ice: Natural and obvious?

CONTINUED FROM PAGE 1 pushed snow from Arbors’ (property accumulation of snow that caused plaintiff’s Defendants filed motions for summary owner/landlord) parking lot onto a injuries.4 judgment asserting that the snow pile sidewalk. Plaintiff left his apartment to Plaintiff admitted that he observed the in question was an open and obvious walk to a laundry facility located on site large pile of snow on the sidewalk before condition, hence they owed no duty to at the apartment complex. He walked on reaching it and that his visibility was not plaintiff. Plaintiff opposed the motions, the sidewalk that he alleged was blocked limited.5 He further stated that there was a asserting that there were genuine questions by the snow pushed by Changing Seasons “cutout in the snow pile” where it appeared of fact on this issue and alternatively, that and slipped due to the snow blocking the that other individuals had walked through the deliberate encounter exception applied, sidewalk.2 the snow pile. He decided to proceed, defeating the open and obvious rule.8 The Plaintiff filed suit against his landlord, laundry basket in hand, and walked through trial court granted defendants’ motions. Arbors, asserting that Arbors was negligent the snow pile. Plaintiff further admitted that in various ways that resulted in the he was able to see where he was walking The Basics of the Open and unnatural accumulation of slow which and was aware that he was walking on snow Obvious Doctrine caused plaintiff’s injuries.3 Plaintiff filed and ice. Plaintiff slipped and broke his ankle The open and obvious doctrine can suit against Changing Seasons, asserting while walking across the snow pile.6 Lastly, preclude any duty being owed to a particular that they had contracted to remove snow plaintiff admitted that there were alternative plaintiff if the condition causing the injury from Arbors’ property, and did so in a paths he could have taken to reach the qualifies as “open and obvious.” A condition negligent fashion, resulting in the unnatural laundry facility that was his destination.7 on land is considered ““open and obvious” when a reasonable person in the plaintiff’s

3 Trial Briefs ▼ OCTOBER 2018 / VOL 65 / NO. 4 position, exercising ordinary perception, Appellate Findings in Winters property owners, claims representatives intelligence and judgment, would recognize The appellate court in Winters found that and other interested parties to consider the condition and the risk involved.”9 the snow on the side walk was, in fact, an not only the natural accumulation rule but Common open and obvious conditions open and obvious condition in light of the also, whether a viable defense is presented are fire and bodies of water, but defects on fact that all parties were aware that it was through the open and obvious condition sidewalks can qualify.10 present. The court further found that the doctrine. There are two commonly recognized deliberate encounter exception not apply as The two may be able to be asserted exceptions to the open and obvious doctrine. plaintiff knew there were alternative routes simultaneously or, as in the Winters case, First, the distraction exception, which applies to his destination, the laundry facility, which it may be very clear that the snow/ice when the possessor of land has reason to he could have taken to avoid traversing the accumulation in issue is unnatural; however, suspect that invitees to the property may be snow pile.13 Further, there were no economic it may be equally clear that the accumulation distracted and will fail to discover or protect factors compelling plaintiff to traverse the is an open and obvious condition which themselves against the open and obvious snow pile in question.14 would not place any duty upon the property condition. This exception only applies when The court did not analyze whether the owner to remove or remediate the condition. evidence is presented that the plaintiff was distraction exception applied; however, actually distracted.11 it is clear that it would not as plaintiff 1. Winters v. MIMG LII Arbors at Eastland, Second, the deliberate encounter exception, admitted that he could see the snow pile in LLC, et. al., 2018 IL (4th) 170669, ¶ 1. applies when the possessor of land has question, and, was aware of its presence. The 2. Id. ¶ 9. reason to expect that the invitee will proceed court affirmed the trial court’s granting of 3. Id. ¶ 10. 4. Id. ¶ 11. to encounter the known or obvious danger Defendants’ motion for summary judgment. 5. Id. ¶ 18. because a reasonable person in the invitee’s 6. Id. position would do so. This exception most Analysis 7. Id. ¶¶ 19-20. 8. Id. ¶¶ 36-37. commonly is applied in cases involving These types of cases are certainly fact 9. Id. ¶ 51, citing Olson v. Williams All Seasons some kind of economic compulsion, but its specific and dependent. When evaluating Co., 2012 IL app (2nd) 110818 ¶ 42. 12 the viability of a personal injury claim 10. Id. presence is not a per se requirement. 11. Id. ¶ 52. arising from injuries related to ice or snow 12. Id. ¶ 53. accumulation, it would behoove attorneys, 13. Id. ¶ 69. 14. Id. ¶ 74.

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