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Land Co-operative Update

by paul spencer Thu Feb 28th, 2008 at 07:24:47 PM EST

Here is a link to my diary from December, titled "A Real Estate Co-op - Dollar Hedge Or Lifestyle - Or Both" http://www.eurotrib.com/story/2007/12/6/222537/054. Since that diary, I have registered the Klickitat Land LLC (Limited Liability Company) in Washington state, dated Jan. 28, 2008. Below the fold is a draft members' agreement. It has been reviewed and critiqued by several friends/accomplices, but I am sending it around to several forums for broader review. This document - or its successor - will become the operating bylaws of the LLC, after I submit it to the state. Any critique or suggestions are appreciated. (Again, this is not a solicitation or a prospectus.)


Preface: the Washington statute (RCW 25.15) is comprehensive and somewhat prescriptive, if left in its default form. However, almost every chapter allows substantial latitude for members to define the particulars. In this case I have tried to incorporate some of the tenets of Chris Cook's approach, plus the practice of a friend, Steve Nieman, in his Downwind Corporation (aircraft ownership/use co-op).

I have made a few decisions that may contrast with Chris' or Steve's opinions. In particular the LLC stands on its own membership without reference to a separate Trustee or Founders' group (whose task would be to guard the Purposes and the asset base from substantial change or abandonment). I chose instead to make certain parts of the agreement revisable only by 100% agreement of all members. In other words there is a high, but not impassable, bar against change in the fundamentals. For most of the operational aspects noted in the agreement, the bar is a supermajority of 75% agreement.

One particular, important decision remains: does the member own some portion of the nominal 5-acre parcel of land, plus the membership? Or is the membership - including right of use per the agreement - the member's only property?

Classes of membership are defined in this agreement. The relationships between the membership classes could be laid out in more detail. Going forward - that is, in development of more such LLCs for other sites - this is the kind of detail that can be customized to the desires of a particular group of members. I like the approach described in this LLC, but it may well be dissuasive to many investors. In any case, as Chris often writes, specific contracts between individuals concerning their relationship within a specific membership can be arranged in any way suitable to them - as long as its nature is legal in Washington.

The agreement is long - sorry - even though I stripped out some of the boilerplate. If you want to see the whole document, e-mail me.

Klickitat Land LLC

Registered office -- Registered agent.
Paul Spencer
250 NE Vista Drive
PO Box 173
Stevenson, WA 98648

Purpose:
Klickitat Land LLC is formed to minimize costs and to maximize use of land, together with collective infrastructure, by the members of the Klickitat Land LLC. The uses of this land can include construction and occupation of homes, agriculture, electrical generation, and all other legal uses of the land that are agreed by a supermajority (75%) of the members of the Klickitat Land LLC.

Restrictions:
Uses of the land will be restricted by considerations of environmental impacts, by the regulations of Klickitat County, and by the statutes and regulations of the State of Washington. The concerns of neighboring land-owners will also be considered within membership forums, when called.

Initial and annual reports:
(1) Klickitat Land LLC shall deliver to the secretary of state for filing, both initial and annual reports that set forth:
   ...

Records and information:
(1) Klickitat Land LLC shall keep at its principal place of business the following:
             ...
    (b) A copy of its certificate of formation and all amendments thereto;
    (c) A copy of its current limited liability company agreement and all amendments thereto, and a copy of any prior agreements no longer in effect;
    (d) A written statement of:
        (i) The amount of cash and a description of the agreed value of the other property or services contributed by each member (including that member's predecessors in interest), and which each member has agreed to contribute;
        (ii) The times at which or events on the happening of which any additional contributions agreed to be made by each member are to be made;
        (iii) Any right of any member to receive distributions which include a return of all or any part of the member's contribution.
    ...
    (f) A copy of any financial statements of the limited liability company for the three most recent years.
...

Management:
 (1)  Management of the business or affairs of the Klickitat Land LLC shall be vested in the members; and
 (2)  Each member is an agent of the Klickitat Land LLC for the purpose of its business and the act of any member for apparently carrying on in the usual way the business of the Klickitat Land LLC binds the Klickitat Land LLC unless the member so acting has in fact no authority to act for the Klickitat Land LLC in the particular matter ... Subject to any provisions in the Klickitat Land LLC agreement, or in the pertinent chapter(s) of RCW 25.15, restricting or enlarging the management rights and duties of any person or group or class of persons, the members shall have the right and authority to manage the affairs of Klickitat Land LLC and to make all decisions with respect thereto.

Piercing the veil:
Members of Klickitat Land LLC shall be personally liable for any act, debt, obligation, or liability of Klickitat Land LLC to the extent that shareholders of a Washington business corporation would be liable in analogous circumstances. In this regard, the court may consider the factors and policies set forth in established case law with regard to piercing the corporate veil, except that the failure to hold meetings of members or managers or the failure to observe formalities pertaining to the calling or conduct of meetings shall not be considered a factor tending to establish that the members have personal liability for any act, debt, obligation, or liability of the Klickitat Land LLC.

Liability of managers and members:
(1) A member or manager shall not be liable, responsible, or accountable in damages or otherwise to the Klickitat Land LLC or to the members of the Klickitat Land LLC for any action taken or failure to act on behalf of the Klickitat Land LLC unless such act or omission constitutes gross negligence, intentional misconduct, or a knowing violation of law.
(2) Every member and manager must account to the Klickitat Land LLC and hold as trustee for it any profit or benefit derived by him or her without the consent of a majority of the disinterested managers or members, or other persons participating in the management of the business or affairs of the Klickitat Land LLC from (a) any transaction connected with the conduct or winding up of the Klickitat Land LLC or (b) any use by him or her of its property, including, but not limited to, confidential or proprietary information of the Klickitat Land LLC or other matters entrusted to him or her as a result of his or her status as manager or member.
 (3) Indemnify any member or manager from and against any judgments, settlements, penalties, fines, or expenses incurred in a proceeding to which an individual is a party because he or she is, or was, a member or a manager, provided that no such indemnity shall indemnify a member or a manager from or on account of acts or omissions of the member or manager finally adjudged to be intentional misconduct or a knowing violation of law by the member or manager, conduct of the member or manager adjudged to be in violation of RCW 25.15.235, or any transaction with respect to which it was finally adjudged that such member or manager received a benefit in money, property, or services to which such member or manager was not legally entitled.
(4) To the extent that, at law or in equity, a member or manager has duties (including fiduciary duties) and liabilities relating thereto to Klickitat Land LLC or to another member or manager (a) any such member or manager acting under the Klickitat Land LLC agreement shall not be liable to the Klickitat Land LLC or to any such other member or manager for the member's or manager's good faith reliance on the provisions of the Klickitat Land LLC agreement, and (b) the member's or manager's duties and liabilities may be expanded or restricted by provisions in the Klickitat Land LLC agreement.
(5) Except as otherwise provided by this chapter, the debts, obligations, and liabilities of Klickitat Land LLC, whether arising in contract, tort or otherwise, shall be solely the debts, obligations, and liabilities of the Klickitat Land LLC; and no member or manager of Klickitat Land LLC shall be obligated personally for any such debt, obligation, or liability of the Klickitat Land LLC solely by reason of being a member or acting as a manager of the Klickitat Land LLC.
(6) A member or manager of Klickitat Land LLC is personally liable for his or her own torts.

Admission of members:
...
(2) After the formation of Klickitat Land LLC, a person acquiring an interest is admitted as a member upon compliance with the Klickitat Land LLC agreement or upon the consent of all members.

Voting and classes of membership:
(1) Except as provided in RCW 25.15, or in the Klickitat Land LLC agreement, and subject to subsection (2) of this section, the affirmative vote, approval, or consent of, more than seventy-five percent of the members (as stated in the records of Klickitat Land LLC required to be kept pursuant to RCW 25.15.135) of the contributions made, or required to be made, by all members of the Klickitat Land LLC shall be necessary for actions requiring members' approval.
(2) The affirmative vote or consent of all members shall be required to:
              (a) Amend this Klickitat Land LLC agreement; or
              (b) Authorize a manager, member, or other person to do any act on behalf of the Klickitat Land LLC that contravenes the Klickitat Land LLC agreement, including any provision thereof which expressly limits or changes the purpose or business of the Klickitat Land LLC or the conduct thereof.
(3) Each member of Klickitat Land LLC has one vote per one unit of property in the Klickitat Land LLC.
(4) Membership classes:
        (a) Owner - an Owner has paid the full price for one unit of property in the Klickitat Land LLC;
        (b) Renter - a Renter has paid the first installment of an agreement with either an Owner or with the Klickitat Land LLC toward payment of the full price of one unit of property in the Klickitat Land LLC;
        (c) Worker - a Worker is a Renter who is making payment for one unit of property in the Klickitat Land LLC by means of in-lieu work on either an Owner's unit of property or a Renter's unit of property or on a  Klickitat Land LLC project.                 (A subcontractor who receives full payment for work performed different from this in-lieu form is not necessarily a Worker in the membership sense.);
        (d) Supplier - a Supplier is a Renter who is making payment for one unit of property in the Klickitat Land LLC by means of in-lieu provision of material to either an Owner or to a Renter or to a Klickitat Land LLC project for use in pursuit of the purposes of the Klickitat Land LLC as defined in this agreement. (A supplier who receives full payment for material different from this in-lieu form is not necessarily a Supplier in the membership sense.)
        (e) In each case (Owner, Renter, Worker, Supplier) the membership is associated with one unit of Klickitat Land LLC property. To illustrate: 1) if the Owner of one unit of property is an LLP, this LLP has one vote and must choose one representative to participate in membership polls; 2) if a Renter's relationship to the LLC is defined by an agreement with an Owner, the Owner and the Renter must also define a method to choose one representative to participate in membership polls.

Form of contribution:
...

Liability for contribution:
(1) A member is obligated to Klickitat Land LLC to perform any promise to contribute cash or property or to perform services, even if the member is unable to perform because of death, disability, or any other reason. ...
(2) The interest of any member of the Klickitat Land LLC who fails to make any contribution that the member is obligated to make shall be subject to specified penalties for, or specified consequences of, such failure. ...

Allocation of profits and losses:
The profits and losses of Klickitat Land LLC shall be allocated among the members in proportion to the agreed value (as stated in the records of the limited liability company required to be kept pursuant to RCW 25.15.135) of the contributions made, or required to be made, by each member.

Allocation of distributions:
Distributions of cash or other assets of Klickitat Land LLC shall be allocated among the members in proportion to the agreed value (as stated in the records of the limited liability company required to be kept pursuant to RCW 25.15.135) of the contributions made, or required to be made, by each member.

Right to distribution:
...

Limitations on distribution:
(1) Klickitat Land LLC shall not make a distribution to a member to the extent that at the time of the distribution, after giving effect to the distribution (a) the Klickitat Land LLC would not be able to pay its debts as they became due in the usual course of business, or (b) all liabilities of the Klickitat Land LLC, other than liabilities to members on account of their Klickitat Land LLC interests and liabilities for which the recourse of creditors is limited to specified property of the Klickitat Land LLC, exceed the fair value of the assets of the Klickitat Land LLC.

Assignment of limited liability company interest:
(1) A Klickitat Land LLC interest is assignable in whole or in part except as provided in this agreement. The assignee of a member's limited liability company interest shall have no right to membership in the Klickitat Land LLC, except upon the approval of 75% of the members of the Klickitat Land LLC, exclusive of the member assigning his or her Klickitat Land LLC interest.
....
(4) For the purposes of this agreement:
    (a) The pledge of, or granting of a security interest, lien, or other encumbrance in or against, any or all of the Klickitat Land LLC interest of a member shall not be deemed to be an assignment of the member's Klickitat Land LLC interest; but a foreclosure or execution sale or exercise of similar rights with respect to all of a member's Klickitat Land LLC interest shall be deemed to be an assignment of the     member's Klickitat Land LLC interest to the transferee pursuant to such foreclosure or execution sale or exercise of similar rights;
    ...
...

Dissolution.
The Klickitat Land LLC is dissolved and its affairs shall be wound up upon the first to occur of the following:    
(1) The written consent of all members;
(2) Ninety days following an event of dissociation of the last remaining member, ...
(3) The entry of a decree of judicial dissolution under RCW 25.15.275.

Administrative dissolution -- Commencement of proceeding.
The secretary of state may commence a proceeding under RCW 25.15.285 to administratively dissolve Klickitat Land LLC if:
(1) Klickitat Land LLC does not pay any license fees or penalties, imposed by this chapter, when they become due;
...

Administrative dissolution -- Notice -- Opportunity to correct deficiencies.
...
(3) A limited liability company administratively dissolved continues its existence but may not carry on any business except as necessary to wind up and liquidate its business and affairs.
...

Winding up.
(1) In the event of dissolution, as described above, the members, or a person approved by 75% of the members, may wind up the Klickitat Land LLC's affairs.

Events of dissociation.
(1) A person ceases to be a member of Klickitat Land LLC, and the person or its successor in interest attains the status of an assignee as set forth in RCW 25.15.250(2), upon the occurrence of one or more of the following events:
    (a) The member dies or withdraws by voluntary act from the Klickitat Land LLC;
    (b) The member ceases to be a member following an assignment of all the member's Klickitat Land LLC interest;
    (c) The member is removed as a member in accordance with the Klickitat Land LLC     agreement;
    ...   
    (f) With written consent of all other members at the time, in the case of a member who is an individual, the entry of an order by a court of competent jurisdiction     adjudicating the member incapacitated, as used and defined under chapter 11.88     RCW, as to his or her estate;
    (g) With written consent of all other members at the time, in the case of a member that is another limited liability company, the dissolution and commencement of winding up of such limited liability company;
    ...

[buy-sell agreements among the members, and agreements relating to expulsion of members. Is definition needed??]

Distribution of assets.
(1) Upon the winding up of Klickitat Land LLC, the assets shall be distributed as follows:
    (a) To creditors, including members and managers who are creditors, to the extent otherwise permitted by law, in satisfaction of liabilities of the Klickitat Land LLC     ...
    (b) To members and former members in satisfaction of liabilities for distributions under RCW 25.15.215 or 25.15.230; and
    (c) To members first for the return of their contributions and second respecting their limited Klickitat Land LLC interests, in the proportions in which the members share in distributions.
(2) A limited liability company which has dissolved shall pay or make reasonable provision to pay all claims and obligations, including all contingent, conditional, or unmatured claims and obligations, known to the Klickitat Land LLC ...

Right to bring action:
A member may bring an action in the superior courts in the right of Klickitat Land LLC to recover a judgment in its favor if managers or members with authority to do so have refused to bring the action ...

Proper plaintiff:
In a derivative action, the plaintiff must be a member at the time of bringing the action and:
(1) At the time of the transaction of which the plaintiff complains; or
(2) The plaintiff's status as a member had devolved upon him or her by operation of law or pursuant to the terms of the Klickitat Land LLC agreement from a person who was a member at the time of the transaction.

Construction and application of RCW 25.15.800 and limited liability company agreement:
(1) The rule that statutes in derogation of the common law are to be strictly construed shall have no application to this chapter.
(2) It is the policy of this chapter to give the maximum effect to the principle of freedom of contract and to the enforceability of limited liability company agreements.

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