## Facts

- Klink, Inc. and four other ready-mix concrete suppliers formed Five Star Concrete, L.L.C. to supply concrete for large construction projects.
- Klink contributed 12.5% of the initial capital in exchange for 12.5% ownership “units.”
- Under the operating agreement, units represented members’ capital contributions, and each unit carried one vote and one share of the LLC’s income, gains, losses, deductions, and credits.
- The operating agreement allowed Five Star to buy out a dissociating member’s interest at fair market value and set out a valuation approach involving accountants.
- Klink withdrew from Five Star, and the remaining members elected to continue the LLC and to buy out Klink’s interest.
- Meeting minutes reflected that the members calculated the value of Klink’s units by subtracting liabilities from assets on a balance sheet and multiplying the result by 12.5%, resulting in a payment of about $61,947 to Klink under a buy-sell agreement.
- When Five Star’s fiscal year ended about two months later, Five Star allocated $31,889 of income to Klink for the portion of the year Klink had been a member, but made no cash distribution tied to that allocation.
- Five Star’s operating agreement did not specify the timing or amount of distributions, and Five Star had made distributions in the past without matching them to tax allocations.
- Klink sued, claiming it was entitled to receive a cash distribution equal to the $31,889 tax allocation.
- The trial court granted summary judgment for Klink, and Five Star appealed.

## Issues

1. Whether a dissociating LLC member has a legal right to receive a cash distribution equal to net income allocated to it for tax purposes.
2. Whether Klink divested itself of all economic rights in Five Star when it sold its units back to the company.
3. Whether the valuation method used for the buyout established that Klink received fair market value for its entire economic interest as of dissociation.

## Decision

- The Court of Appeals of Indiana affirmed in part, reversed in part, and remanded.
- The court held that a dissociating member’s compensable interest is its economic interest, which is not limited to return of contributed capital and may include the member’s share of profits and losses attributable to the period of membership.
- The court rejected the view that a tax allocation, by itself, creates an automatic entitlement to an equal cash distribution, especially where the operating agreement is silent on distribution timing and the company’s practice did not tie distributions to allocations.
- Because the record did not conclusively establish what the buy-sell payment represented (and whether it already reflected the fair value of Klink’s full economic interest, including any undistributed profits), summary judgment awarding Klink an additional $31,889 was improper.
- The case was remanded for further proceedings to determine the effect of the parties’ agreements and the proper valuation of Klink’s economic interest.

## Legal Principles

- Under Indiana LLC law, a withdrawing member is entitled to be paid the fair value of its economic interest as of dissociation, unless the operating agreement provides otherwise.
- A member’s economic interest generally consists of the right to share in distributions (including value tied to profits and losses), not merely the member’s initial capital contribution.
- Pass-through taxation may allocate LLC income to a member for tax reporting even when no cash is distributed; tax allocation alone does not set distribution rights.
- When a buyout is based on “fair market value,” the substance of the valuation method and the parties’ intent control; if those matters are disputed or unclear, summary judgment is not appropriate.
- Courts seek to avoid double payment by determining whether an agreed buyout price already captured value attributable to earnings during the member’s ownership period.

## Conclusion

Five Star Concrete held that a dissociating LLC member is entitled to the fair value of its full economic interest, which may reflect profits and losses earned during membership, but a tax-only income allocation does not automatically require a matching cash distribution; because it was unclear whether the buyout price already compensated Klink for the interest represented by the allocation, the appellate court reversed the summary judgment award of the additional amount and remanded for further proceedings.


Five Star Concrete, L.L.C. v. Klink, Inc., 693 N.E.2d 583 (1998)