Levey v. Brownstone Asset Mgmt., LP, et al., C.A. No. 5714-VCL (Del. Ch. Aug. 1, 2014) (Laster, V.C.)

By Scott Waxman and Marisa DiLemme

In Levey v. Brownstone Asset Mgmt., LP, et al., the plaintiff, Gordon Levey (“Levey”), and the three individual defendants worked together as principals in a financial services boutique, Brownstone Investment Group LLC.  Operating out of the same office, Levey and the three defendants also ran a hedge fund.  In this action, Levey, after resigning from the financial services boutique, sought a declaration that he continued to own equity in two of the entities through which the boutique operated: (1) Brownstone Investment Partners LLC, a Delaware limited liability company, which was the passive manager of the hedge fund (the “Passive Manager”); and (2) Brownstone Asset Management LP, a Delaware limited partnership, which was the active manager of the hedge fund (the “Active Manager”). Levey sought a declaration that he continued to hold a 5% interest in the Passive Manager and the Active Manager, and if he did remain an owner of those interests, he demanded his proportionate share of all past distributions made by those entities.  He also sought an order requiring the defendants to identify any undisclosed profits (from which he would presumably also seek his share).

The court first addressed the critical factual issue of whether Levey withdrew from the Passive Manager and the Active Manager on January 26, 2006.  Levey argued that he may have tried to withdraw but failed in the attempt, while the defendants argued that he could and did withdraw.  The court found that an objective viewer would regard Levey as withdrawing, listing actions that support this conclusion – he turned in his keys, he cut up his corporate charge card and building identification card, and the other principals and employees of the firm gathered together and said goodbye to him.  He also withdrew his personal funds that were invested in the hedge fund.  Levey argued that he intended to resign as an employee and to withdraw from the financial services boutique, but not to withdraw from the Passive Manager and the Active Manager.  However, based on the dislike Levey had expressed for his partners, the court did not find it credible that he wanted to maintain his relationship with his partners through the Passive Manager and the Active Manager.  Therefore, the court found that Levey withdrew from the Passive Manager and the Active Manager on January 26, 2006.

Whether Levey could withdraw, whether he did so effectively, and what the implications of his withdrawal would be were matters determined by the agreements governing the Passive Manager and the Active Manager.  Therefore, the court next decided whether the implied agreement between the parties or the default provisions of the Delaware Limited Liability Company Act and the Delaware Limited Partnership Act (together, the “Acts”) controlled in this action.  The default rule under the Acts is that in the absence of an agreement, a partner or member may not withdraw prior to the dissolution or winding up of the entity.  Upon withdrawal, a partner is entitled to the fair value of his interests.  The Court found that through his conduct, Levey manifested an intent to withdraw, and through their conduct, the defendants manifested their acceptance of his withdrawal.  As a result, their implied agreement that Levey had withdrawn had modified the default rules in the Acts that otherwise would have prevented Levey’s withdrawal before dissolution and winding up.

According to the defendants, they had an unwritten agreement with Levey by which Levey would automatically give up his interests in the Passive Manager and the Active Manager if he resigned from the financial services boutique and would receive only the value of his capital account in each entity. Because Levey did not meet his burden of proof when he failed to present any evidence of the fair value of his interests as of January 26, 2006, the court did not have to determine whether the terms of the unwritten agreement or the default rules governed the amount Levey should receive; the outcome under both the unwritten agreement and the default rules were the same.   Therefore, the court found that Levey was not entitled to any amounts beyond the value of his capital accounts, which was $35,042.67, plus pre- and post- judgment interest from January 26, 2006 until the date of payment.

The court rejected Levey’s argument that his withdrawal was ineffective because he and the defendants never reached agreement on the fair value of his interests.  The court found that the implied agreement between the parties did not require such agreement, and the Acts created a baseline expectation in which the ability of a member or partner to withdraw is distinct from the question of what the departing member or partner would receive in compensation.  The court also rejected Levey’s argument that the Delaware statute of frauds barred the effectiveness of his withdrawal, finding that both the act of withdrawing and payment of whatever compensation Levey was due could have been completed within one year.

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