Facts

In 1995, Reddy, Reddy, Minnis, and Barnes formed FMDC, an LLC, to develop two
office buildings in San Jose. The Reddys and Minnis invested capital and were the capital
members of FMDC. Barnes did not invest capital and was the managing member of FMDC. According to plaintiff, Barnes was the sweat equity partner, and was not entitled to any distribution until the other members received a return on their capital investment ($30 million), plus a preferential return of 50 percent.

In 2002, Barnes deposited $243,000 from the LLC into his personal account. After being confronted about a misappropriated funds in 2004, Barnes repaid the money that went into his personal account. The capital members subsequently removed Barnes as manager for embezzlement and mismanagement, which Barnes denied. When Barnes was removed, the court issued an injunction, precluding him from taking any role in the management or operations of the company.

The Operating Agreement of FMDC called for a buyout of a removed manager's interest in the amount of the removed manager's capital account balance, or alternatively, according to a valuation process by three appraisers who would determine the fair market value of Barnes' interest in the LLC. According to plaintiff, Barnes' capital account, at the time of his removal, was stated in the books and records of the partnership, to have a negative amount.

PLAINTIFF'S CONTENTIONS:
Barnes contended the capital members breached the contract by failing to go through the appraisal process and by failing to pay the amount the capital members determined to be the value of his interest according to the fair market value of his interest in the company. Barnes originally contended he was entitled to a buyout of his membership interest in the amount of approximately $16 million based on an appraisal valuing FMDC's commercial property in excess of approximately $79 million. Barnes subsequently amended his complaint to claim alternatively that his capital account was not properly calculated, and that his capital account was really $6.5 million. Barnes claimed the expert hired by the capital members' original counsel, who opined that Barnes stole in excess of $2 million, made fundamental errors in his analysis, and that all of the allegedly stolen funds (with the exception of the $243,000 in his personal account for two years) were properly incurred for the company.

DEFENDANT'S CONTENTIONS:
The capital members disputed Barnes' valuation of his interest in FMDC premised on his property appraisal. The capital members contended this valuation was grossly inflated because it was based on an unsupportable appraisal of the building values, and it failed to include applicable discounts commonly applied to valuations of real estate partnership interests. Further, in response to Barnes' subsequent theory regarding his capital account, the capital members contended that the capital accounts were properly calculated based on the nine-year course of Barnes' own conduct and the parties' understanding. Barnes himself had allocated capital among the members in FMDC during his nine years as manager, during which time the capital members paid taxes on the profits that he allocated them. The capital members contended that this nine-year course of conduct belied the new theory by Barnes regarding his capital account.

Settlement Discussions

A preliminary mediation in September 2005 with retired judge Richard Silver proved unsuccessful. The parties then engaged in two further mediation sessions with John Bates, Jr. at JAMS respectively in March and May 2006, ultimately coming to terms at the second session.

Damages

Barnes claimed he was entitled to a buyout of his membership interest based on the appraisal, or alternatively based on the value of his capital account, plus prejudgment interest and attorney's fees. The capital members claimed they were owed the value of any FMDC funds Barnes misappropriated, plus prejudgment interest and attorney's fees.

Result

The capital members paid Barnes $3 million cash on June 5, 2006, with the balance of $4.5 million payable over three years, secured by a first deed of trust on the subject property. Settlement agreement was fully executed June 5, 2006.

Other Information

In 2005, the capital members changed counsel.