Interest Dilution and Damages as Contribution-Default Remedies in Failing LLCs and Partnerships

5 Pages Posted: 14 Dec 2018

Multiple version iconThere are 2 versions of this paper

Date Written: December 4, 2018

Abstract

Interest dilution often appears as a contribution-default remedy in LLC operating agreements and limited partnership agreements. Entities adopt interest-dilution remedies to create a financial incentive for members to fulfill their contribution obligations. That incentive generally would not exist in a failing arrangement because members will hesitate to throw good money after bad, so, if the only contribution-default remedy is interest dilution, members of a failing LLC or partnership may be able to avoid making additional contributions to the entity. To enforce a contribution obligation, the entity agreement must allow for damages as a remedy. This article discusses three recent cases (two from Kansas and one from Delaware) that identify situations in which the entity agreement limits contribution-default remedies to interest dilution and those that provide for damages as a possible remedy. The cases show that careful drafting is necessary to ensure the arrangement achieves the parties’ objectives, and the article discusses steps drafters may take to properly document those objectives.

Suggested Citation

Borden, Bradley T. and Rutledge, Thomas E., Interest Dilution and Damages as Contribution-Default Remedies in Failing LLCs and Partnerships (December 4, 2018). Business Law Today (Nov. 2018); Brooklyn Law School, Legal Studies Paper No. 578. Available at SSRN: https://ssrn.com/abstract=3295793

Bradley T. Borden (Contact Author)

Brooklyn Law School ( email )

250 Joralemon Street
Brooklyn, NY 11201
United States

HOME PAGE: http://www.brooklaw.edu

Thomas E. Rutledge

Stoll Keenon Ogden PLLC ( email )

2000 PNC Plaza
500 West Jefferson Street
Louisville, KY 40202-2828
United States

HOME PAGE: http://skofirm.com

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