April 2007 — Issue 14

Campbell v. Lichtenfels

No. CV44005066S, 2007 WL 447919 (Conn. Super. Jan. 26, 2007)

Personal liability of partner for malpractice claim against partnership in absence of proof that partnership filed certificate of limited liability partnership with Secretary of State.

Estate of E.A. Collins v. Geist

__ P.3d __, No. 32018, 2007 WL 518445 (Idaho 2007).

Two individuals, Michael Collins and Russell Purcell, formed an Idaho LLC. The articles of organization stated that management was vested in the managers and listed each as managers. Purcell testified that he had nothing further to do with the LLC after signing the articles of organization and that he was not a member. Michael Collins later amended the articles of organization to change the name of the LLC, remove Purcell as a manager, and add Michael’s father as a manager. A corporation owned by Michael’s father transferred various improved and unimproved lots and a model home to the LLC, and the LLC’s sole purpose at that point was to develop and sell that property. After Michael’s father died, his estate sought to set aside deeds executed by Michael on behalf of the LLC conveying various lots. The court first found that there was no genuine issue of fact as to whether Michael was a manager of the LLC. The estate argued that Michael could not have been a manager because the Idaho Limited Liability Company Act states that management is vested in the members unless an operating agreement vests management in one or more managers. The estate contended there was no operating agreement, but the court pointed out that, under Idaho law, an operating agreement is any agreement, written or oral, among all the members as to the conduct of the business and affairs of the LLC. The court concluded that Michael was a member of the LLC, even though he did not provide any capital (i.e., money or assets) to the LLC, because his use of credit to obtain construction loans was sufficient consideration for issuance of an LLC interest under the Idaho LLC statute. Since Purcell did not provide any consideration to the LLC and testified that he had no further involvement after signing the articles of organization, the court concluded that Michael was the sole member of the LLC and that there was an operating agreement if Michael was in agreement regarding the business and affairs of the LLC. The court stated that Michael obviously agreed that he would conduct the business and affairs of the LLC. Thus, there was an operating agreement, and Michael qualified as a manager. After Michael amended the articles of organization to remove Purcell as a manager and add his father, it was unclear whether his father became a member. Assuming his father became a member, the court concluded that Michael and his father agreed that Michael would manage the LLC. Although Michael testified in his deposition that they had no operating agreement, the court accepted Michael’s explanation that he thought the question referred to a written operating agreement. The court concluded that the conduct of Michael and his father clearly showed that they had agreed that Michael would conduct the business and affairs of the LLC, and Michael thus qualified as a manager. The court then rejected the estate’s argument that Michael’s authority to convey real estate on behalf of the LLC must be in writing under the provisions of an Idaho statute that requires conveyance of an estate in real property to be made by a written instrument that is signed by the conveyor or the conveyor’s agent authorized in writing. The court relied upon provisions of the Idaho LLC statute conferring apparent authority on a manager when apparently carrying on the business of the LLC in the usual way and providing that title to LLC property may be transferred by an instrument of transfer executed by a manager in the name of the LLC. The court noted that an LLC may only act through its agents and concluded that the specific provisions of the LLC statute control over the more general statute requiring an agent’s authority to be in writing when a conveyance of real property is involved.

Tzolis v. Wolff

829 N.Y.S.2d 488, 2007 N.Y. Slip Op. 01190 (N.Y. A.D. 1 Dept. 2007).

Creating a split in the New York state courts, the court held that New York law permits an LLC member to sue derivatively on behalf of the LLC notwithstanding the absence of language authorizing derivative suits in the LLC statute. Declining to follow the contrary conclusion reached by the Second Department, the First Department based its decision on: (1) the historic recognition of a common law right to bring a derivative action on behalf of a limited partnership and corporation, both of which share many of the LLC’s characteristics, (2) principles of statutory construction providing that only a clear statement of legislative intent may override the common law, (3) the fact that most states provide a statutory right to bring a derivative claim, and (4) the unpersuasive rationale of decisions rejecting derivative claims for LLC members.

Pennacchio v. Powers

No. 05-CV-0985 (JFB)(SMG), 2007 WL 446355 (E.D. N.Y. Feb. 5, 2007).

The court disagreed with other federal district courts in New York and followed state court decisions holding that a member of an LLC may not bring a derivative claim on behalf of the LLC because of the absence of language in the New York LLC statute authorizing derivative suits. The court noted that the New York Court of Appeals has yet to address this issue, but that lower courts in New York had uniformly held that there is no right to bring a derivative action on behalf of an LLC. (The First Department’s decision summarized above was issued three days after this decision). The court concluded that the non-binding lower court decisions should be given proper regard and that these decisions are the best indicator of how the New York Court of Appeals will decide the issue. The court acknowledged federal district court decisions recognizing the right to bring a derivative action on behalf of an LLC under New York law, but found the lower court decisions rejecting a right to sue derivatively to be fully supported by the plain language of the LLC statute and the deliberate rejection by the legislature of a provision authorizing such actions.

In re Allentown Ambassadors, Inc. (Allentown Ambassadors, Inc. v. Northeast American Baseball, LLC)

__ B.R. __, Bankruptcy No. 04-22368ELF, Adversary No. 04-2390, 2007 WL 316674 (Bankr. E.D. Pa. Feb. 5, 2007).

The court addressed several issues in a lengthy opinion dealing with the debtor corporation’s rights and status as a member of a dissolved LLC. The debtor corporation operated a minor league baseball team and was a member of a baseball league organized as a North Carolina LLC. The debtor’s primary claim was that the other members of the LLC exercised control over property of the estate, in violation of the automatic stay provision of Section 362(a)(3) of the Bankruptcy Code, when the members dissolved the LLC and formed a new league without the debtor. The debtor also claimed that an individual manager of the LLC breached his fiduciary duty to the debtor. The defendants sought summary judgment on these claims, but the court denied the motion as to both claims. With respect to the first claim, the defendants argued that the debtor’s bankruptcy terminated its membership in the LLC under the terms of the operating agreement, which resulted in the debtor’s status changing from that of member to assignee. The defendants claimed that the subsequent dissolution of the LLC did not deprive the debtor of any rights and was not a violation of Section 362(a)(3) since the debtor still had its economic rights to receive the distributions to which it was entitled under the operating agreement. After a lengthy analysis, the court concluded that the record was inadequate at this stage of the proceedings to permit the court to determine whether the provision of the LLC operating agreement purporting to terminate the debtor’s membership in the LLC upon the debtor’s bankruptcy filing was enforceable under Section 365(e) of the Bankruptcy Code. The court analyzed the rights of a member under the North Carolina Limited Liability Company Act as well as the enforceability of the ipso facto provision in the operating agreement and concluded that the operating agreement was an executory contract but that the record did not establish whether the ipso facto provision terminating the debtor’s membership upon its bankruptcy filing was enforceable. In the course of its discussion, the court concluded that the provisions of the North Carolina LLC statute, which provide that a membership interest is assignable in whole or in part, but require unanimous consent of the other members for an assignee to become a member, do not constitute a clear and unequivocal prohibition on assignment under “applicable law ... excus[ing] a party from accepting performance from or rendering performance to” an assignee for purposes of Section 365(c)(1) and (e)(2). The court then considered the nature of the operations of the LLC baseball league and concluded that the record did not permit the court to determine whether the identity of a member was a material aspect of the operating agreement or whether the only material prerequisite to admission of a new member was the member’s ability to perform its obligations under the agreement. Because the court could not determine whether the debtor’s membership terminated upon its bankruptcy, and the parties did not dispute that the debtor retained its economic rights in the LLC, the defendants were not entitled to summary judgment on the debtor’s claim that they violated Section 362(a)(3) by exercising control over the debtor’s property when they dissolved the LLC. Finally, even assuming the debtor only retained its economic rights in the LLC, the court determined that the impact of dissolution of the LLC on those rights alone was significant enough to warrant denial of the defendants’ summary judgment motion on the Section 362(a)(3) claim. With respect to the individual manager’s fiduciary duty claim, the court examined provisions of the North Carolina LLC Act as well as the operating agreement and rejected the manager’s argument that his duty was owed solely to the LLC and not to individual members. The court predicted that North Carolina appellate courts would extend to LLCs the principles developed in the case law of closely held corporations. The court thus concluded that majority members of an LLC owe a fiduciary duty to minority members (based on the duty owed by majority shareholders to minority shareholders) and that the defendant manager would also owe a duty to the individual members because the manager’s powers were derived from and delegated to the manager by the member-managers of the LLC. While the court acknowledged that the debtor might have a difficult time proving that the manager breached his duty, the court perceived the possibility that the challenged conduct was part of a pattern to “oppress” the debtor. Thus, the manager was not entitled to summary judgment.

Gottsacker v. Monnier

No. 2006AP766, 2007 WI. App 34, 2007 WL 259836 (Wis. App. Jan. 31, 2007).

This is the third appellate opinion in a case arising from a dispute among three members of a Wisconsin LLC. The plaintiff sued his two co-members who voted to transfer the LLC’s real estate (the LLC’s sole asset) to their newly formed LLC without advising the plaintiff. The Wisconsin Court of Appeals held that the conflict of interest of the two members did not preclude them from voting, but held that the members had acted unfairly. The Wisconsin Supreme Court agreed with the court of appeals that the two members possessed the majority interest necessary to authorize the transfer of the LLC’s property, but remanded for a determination of whether the two members willfully failed to deal fairly with the other member or the LLC. The supreme court concluded that properly authorized members with a material conflict of interest can vote their ownership interests unless their act or failure to act constitutes a “willful failure to deal fairly” with the LLC or its members. The court relied upon a provision of the Wisconsin LLC statute that states that, unless otherwise provided in the operating agreement, no member or manager shall act or fail to act in a manner that constitutes a willful failure to deal fairly with the LLC or its members in connection with a matter in which the member or manager has a material conflict of interest. The members had no agreement relieving them of the statutory obligation, and the trial court on remand examined the actions of the majority members. The court found that certain actions could be construed as unfair (lack of notice to the third member or an opportunity to vote or be heard, no effort to market the property, no arm’s length transaction, no third party appraisal, and no assets left in the LLC). However, the court found that the sale price was not unfair based on all the evidence, and the sale was not adverse to the LLC. Although the trial court found that the majority’s actions were not “appropriate,” they fell short of a willful failure to deal fairly. The court of appeals affirmed the trial court’s decision, noting that the supreme court had explained that a determination of “willful unfairness” necessitated both unfairness (conduct) and injury (end result). The court concluded that the evidence supported the trial court’s determination that the plaintiff had not demonstrated the requisite injury.

First American Real Estate Information Services, Inc. v. Consumer Benefit Services, Inc.

No. 03CV0633 BNLS, 2004 WL 5203206 (S.D. Cal. April 23, 2004).

interpretation of operating agreement provision limiting fiduciary duty of managers as not limiting duty of members.

Southwest Health and Wellness, L.L.C. v. Work

282 Ga.App. 619, 639 S.E.2d 570, Nos. A06A1639, A06A1928 (Ga. App. 2006).

Derivative nature of minority members’ claims for breach of operating agreement and breach of fiduciary duty; inapplicability of exception permitting direct action in context of closely held LLC because all shareholders were not parties.

In re Herrman (Compton v. Herrman)

355 B.R. 287, Bankruptcy No. 05-15429-7, Adversary No. 05-5834 (Bankr. D. Kan. Nov. 28, 2006).

Transfer of debtor’s home to debtor’s wholly owned LLC not fraudulent transfer.

Slayter & Slayter, LLC v. Ryland

__ So.2d __, No. 06-1385, 2007 WL 675870 (La. App. 2007).

Fiduciary duty of office manager/controller who was not “manager” under LLC organizational documents.

Kreisler v. Goldberg

478 F.3d 209, No. 05-2238 (4th Cir. 2007).

Recognition of wholly owned LLC subsidiary of LLC debtor as separate entity under Maryland law such that automatic stay did not protect subsidiary nor did debtor have any direct interest in assets of subsidiary.

G&G Management LLC v. Young Brothers and Co., Inc.

Civil No. 05-162-B-K, 2007 WL 551761 (D. Me. Feb. 21, 2007).

Standing of “series” LLC to assert breach of contract claims with respect to boat owned by series.

In re Gilbert (Teasck v. Gilbert)

Bankruptcy No. 06-10119-JMD, Adversary No. 06-1142-JMD, 2007 WL 397018 (Bankr. D. N.H. Feb. 1, 2007).

Application of corporate veil piercing principles to New Hampshire LLC; insufficiency of evidence to pierce veil of single member LLC.

Ledy v. Wilson

__ N.Y.S.2d __, 2007 WL 611200 (N.Y. A.D. 1 Dept. 2007).

Sufficiency of summary judgment evidence to raise fact issue regarding piercing of LLC; potential personal liability of LLC officers for LLC’s breach of contract if officers acted on LLC’s behalf and breach involved bad faith misrepresentations.

Ferron v. VC E-Commerce Solutions, Inc.

No. 2:06-CV-322, 2007 WL 295455 (S.D. Ohio Jan. 29, 2007).

Foreign LLC’s failure to qualify to transact business as not constituting deceptive trade practice under Ohio Consumer Sales Practices Act.