August 2010 — Issue 54

LLP Cases: Largo Realty, Inc. v. Purcell

928 N.E.2d 999 (Mass. App. 2010).

The plaintiff sued for breach of contract and other claims arising out of alleged overbilling by BDO Seidman, LLP (“BDO”) for services provided the plaintiff under a written contract between the plaintiff and BDO. The plaintiff’s complaint named an employee of the partnership who rendered services to the plaintiff and the employee’s supervising partner, Russo, individually and as a partner in BDO. The defendants filed a motion to dismiss, which the trial court granted. The plaintiff argued that it made BDO a party by suing Russo in his capacity as a partner. The court discussed “three forms of partnerships” in Massachusetts: the general partnership, limited partnership, and limited liability partnership. The court characterized all partners in an LLP as “limited partners” and described their protection from personal liability for the partnership’s debts, obligations, and liabilities under the statute. The court stated that the partners in an LLP do not hold any assets as tenants in partnership and that recovery is limited to the partnership’s assets. Thus, the court concluded that, in order to sue BDO, the partnership itself needed to be named as a party. Because the plaintiff acknowledged that its contract was with BDO and that BDO generated the bills which allegedly overbilled the plaintiff, the court concluded that the complaint failed to allege facts that provided a basis for relief against the partner and employee individually. The trial court’s dismissal was thus affirmed.

LLC Cases: DGB, LLC v. Hinds

55 So.3d 218 (Ala. 2010)

DGB, LLC (“DGB”) was a member of another LLC known as Bon Harbor, LLC (“Bon Harbor”). Bon Harbor’s other members were two other entities, Decatur, LLC (“Decatur”) and Gulf Stream Properties, Inc. (“Gulf Stream”). Two individuals, Hinds and Kirkland, owned Decatur and Gulf Stream through other entities and acted as managers of Bon Harbor. Bon Harbor was formed to purchase and develop real property, and DGB and its members sued Decatur, Gulf Stream, Hinds, and Kirkland for fraudulent misrepresentation, fraudulent suppression, securities fraud, shareholder oppression, breach of fiduciary duty, negligence, and conspiracy based on alleged misconduct in connection with Bon Harbor’s purchase of the property. The plaintiffs also sued Jacobsen, the party who sold the property to Bon Harbor. The plaintiffs alleged that Bon Harbor purchased the property from Jacobsen for $10,000,000 just days after Jacobsen had purchased the property for $5,000,000, and that Hinds and Kirkland, through Decatur and Gulf Stream, knew that Jacobsen had purchased the property for one-half what Bar Harbor paid and concealed that fact from the plaintiffs. The plaintiffs also alleged other misconduct involving Jacobsen, Hinds, and Kirkland and that the misconduct was concealed from the plaintiffs. The trial court dismissed the plaintiffs’ claims without specifying the grounds. The Alabama Supreme Court reviewed each claim and the possible bases for dismissal and affirmed the dismissal of some of the claims and reversed as to others. Although the court stated that the two-year statute of limitations applied to the plaintiffs’ claims (other than a claim for judicial dissolution), and the plaintiffs did not file suit until more than two and a half years after the events giving rise to their claims, the court held that the plaintiffs’ claims were not barred by the statute of limitations because of a statutory savings clause. The statutory savings clause provides that in actions seeking relief on the ground of fraud, the claim does not accrue until discovery by the aggrieved party of the fact constituting the fraud. The court held that this savings clause applied not only to the plaintiffs’ fraud claims, but also to the remaining claims of shareholder oppression, breach of fiduciary duty, civil conspiracy, and negligence. Viewing the allegations in the complaint in the plaintiffs’ favor, the court concluded that the plaintiffs alleged facts sufficient to preclude dismissal on limitations grounds. The plaintiffs also sought judicial dissolution, and the court pointed out that the LLC statute provides for judicial dissolution “whenever” a member can show that it is not reasonably practicable to carry on the business in conformity with the LLC’s articles of organization or operating agreement; therefore, this claim was not time-barred. The defendants asserted that the plaintiffs’ claims involved injury to Bon Harbor and were thus derivative, that the members of DGB had no standing to seek relief, and that DGB was required to make demand on Bon Harbor to sue the defendants and then proceed derivatively if the demand was unsuccessful. The court concluded that the plaintiffs alleged claims on their own behalf by alleging that the defendants made representations directly to and concealed information directly from the plaintiffs, that the plaintiffs relied on the representations and concealment, and that the plaintiffs consequently personally guaranteed a bank loan for the purchase of the property. Further, the plaintiffs alleged that they were required to pay a portion of the purchase price for the property. The court found that these allegations described individual injury, distinguishing Carey v. Howard, a previous opinion in which the court had held that the members of an LLC did not allege individual injury. The court next addressed the sufficiency of the pleadings with respect to the various causes of action alleged. The court reviewed the plaintiffs’ allegations regarding the information conveyed and concealed by Hinds, Decatur, Kirkland, and Gulf Stream and concluded that the plaintiffs stated claims for fraudulent misrepresentation against those defendants but not against Jacobsen. The plaintiffs only alleged that Jacobsen sold the property to Bon Harbor for more than he paid for it, and the allegations did not reflect any direct dealings between Jacobsen and the plaintiffs. Therefore, dismissal of the fraudulent misrepresentation claim against Jacobsen was appropriate. With regard to the fraudulent suppression claim, the court likewise concluded that the plaintiffs stated a claim against Hinds, Decatur, Kirkland, and Gulf Stream, but not against Jacobsen. The plaintiffs alleged a duty to disclose by Hinds and Kirkland as managers of Bon Harbor and by Decatur and Gulf Stream as members, but the plaintiffs did not allege any duty to disclose by Jacobsen. The plaintiffs alleged a state law securities fraud claim against Hinds, Decatur, Kirkland, and Gulf Stream. The court described the Alabama securities fraud provision as requiring “(1) a sale or an offer to sell a security (2) by means of a false statement or omission (3) of a material fact and (4) the ignorance of the buyer as to the untruth or omission.” The plaintiffs based their claim on DGB’s purchase of a 40% interest in Bon Harbor. The court stated that it is unclear whether a claim under the Alabama securities fraud provision may arise from the sale of an LLC interest and that the plaintiffs did not allege any false statement or omission of material fact by the defendants relating to DGB’s purchase of an interest in Bon Harbor. Thus, the court held that the plaintiffs did not state a claim for securities fraud. The plaintiffs asserted a claim for shareholder oppression against Hinds, Decatur, Kirkland, and Gulf Stream, but the court held that dismissal of the claim was appropriate. In support of their argument that the trial court erred in dismissing their shareholder oppression claim, the plaintiffs relied only upon a treatise and a provision of the Alabama LLC statute stating that the members of an LLC must discharge the duties to a member-managed LLC and its members and exercise any rights consistently with the obligation of good faith and fair dealing. The court stated that the plaintiffs did not cite any Alabama authority showing that the statute applied to Hinds, Kirkland, Decatur, or Gulf Stream or that the statutory provision supports a claim of “shareholder oppression,” nor did the plaintiffs cite any authority showing that the allegations of their complaint adequately stated such a claim. Because it is not the court’s job to do a party’s legal research or address arguments not supported by sufficient authority or argument, the court did not consider the arguments as to this claim and affirmed the trial court’s dismissal. The court held that the plaintiffs sufficiently alleged a breach of fiduciary duty claim against Hinds, Decatur, Kirkland, and Gulf Stream by alleging the existence of a duty and the misrepresentation and concealment of information from the plaintiffs, the use of Bon Harbor funds for their own purposes, and proceeding with the purchase of the property with knowledge of its actual value. The plaintiffs sufficiently alleged injury based on Bon Harbor’s purchase of the property for twice its value, the plaintiffs’ guaranty of the bank loan, and the plaintiffs’ contribution to the purchase price. Based on the plaintiffs’ allegations of underlying causes of action against Hinds, Decatur, Kirkland, and Gulf Stream, and allegations that those defendants worked together with Jacobsen to engage in unlawful conduct, the plaintiffs stated a claim for civil conspiracy. The court held that the plaintiffs stated a claim against Hinds and Kirkland, as managers of Bon Harbor, for breach of their duty of care based on the purchase of the property with the knowledge that the value of the property was less than what the plaintiffs were required to pay. Because the plaintiffs failed to cite any authority in support of their argument that the trial court erred in dismissing their claim for accounting and dissolution of Bon Harbor, the court affirmed the dismissal of that claim. The court noted that resolution of the remaining claims may give rise to new facts and circumstances compatible with the renewal of matters made the basis of the claim.

Olmstead v. Federal Trade Commission

44 So.3d 76 (Fla. 2010)

The Florida Supreme Court answered a certified question from the Eleventh Circuit Court of Appeals regarding the rights of a judgment creditor of a single member LLC and concluded that the Florida LLC charging order statute does not preclude a judgment creditor from using the remedy of execution on the interest of a single member of an LLC to reach all of the member’s right, title, and interest in the LLC. The court reviewed the concepts of membership, a membership interest, assignment, and the charging order under the Florida LLC statute and concluded that the assignee of a single member of an LLC becomes a member without the consent of anyone other than the transferor member because the set of “all members other than the member assigning the interest” (whose consent is required under the statute to admit an assignee of a member) is empty. The court then concluded that the charging order remedy is not the exclusive remedy of a judgment creditor of an LLC member because the charging order provision does not state that the charging order is the exclusive remedy, in contrast to the Florida general and limited partnership statutes, which explicitly provide that the charging order is the exclusive remedy by which a judgment debtor of a partner may satisfy a judgment out of the judgment debtor’s interest. The court noted that there is a general execution provision in Florida that applies to various forms of real and personal property, including “stock in corporations,” and the court stated that an LLC is a type of corporate entity the ownership interests of which can reasonably be understood to fall within the scope of “corporate stock.” The appellant judgment debtors did not contend that the execution statute did not by its terms extend to an ownership interest in an LLC or that the challenged order did not comport with the requirements of the execution statute. They relied only upon the exclusivity of the charging order provision. Because the court concluded that there was no basis to infer that the charging order statute provides the sole remedy for a judgment creditor against a judgment debtor’s interest in a single member LLC, it does not displace the general execution remedy with respect to such an interest. Thus, the court held that a court may order a judgment debtor to surrender all right, title, and interest in the debtor’s single member LLC to satisfy a judgment. A strenuous and lengthy dissenting opinion argued that the majority rewrote the LLC statute and rendered the assets of all LLCs in Florida vulnerable because the majority’s reasoning applied with equal force to multi-member LLCs. [Note that the Florida LLC charging order provisions were amended as a result of this opinion to explicitly distinguish between the effect of a charging order in the single-member LLC and multi-member LLC contexts.]

Price v. Upper Chesapeake Health Ventures

995 A.2d 1054 (Md. Ct. Spec. App. 2010)

In 2007, members of a Maryland LLC filed a derivative suit against members of the LLC’s management committee and other members who approved or ratified the sale of substantially all of the LLC’s assets in 2004. The plaintiffs asserted claims for breach of fiduciary duty and other causes of action in connection with the sale. The defendants sought dismissal on various grounds, and the trial court dismissed the case. The appellate court held that dismissal of the case was proper because the LLC’s right to do business and use its name had been forfeited in 2006 due to the LLC’s failure to file its annual tangible property tax report. The court examined the statutory provision addressing forfeiture of an LLC and concluded that it differs from the corporate counterpart in that the LLC’s existence as an entity does not cease upon a tax forfeiture whereas the corporate statute provides for forfeiture of the corporate charter when a corporation fails to file tax reports or pay taxes. Although the LLC’s existence as an entity does not cease upon a forfeiture, the court concluded that the forfeiture of its right to do business and use its name precludes a forfeited LLC from prosecuting a suit. The court found it significant that a savings provision preserves the validity of the LLC’s contracts and the LLC’s ability to defend an action in court after a forfeiture but does not state that an LLC may file or maintain a lawsuit. The court recognized that the members continued to be members at the time the action was brought because the LLC continued to exist, but the court held that the members could not file a derivative suit because the LLC was the real party in interest and it could not prosecute a suit at that time. The plaintiffs argued that the court should recognize an exception similar to exceptions recognized in other states that permit a shareholder to maintain a derivative action when the board of directors has caused the corporation to lose its authority to litigate or has otherwise caused the corporation to take action that deprived a shareholder of standing. The court discussed a number of cases in other jurisdictions and distinguished those cases from the instant case on various grounds. The court noted that the plaintiffs in this case did not allege or suggest that the LLC’s management committee deliberately caused the forfeiture in order to defeat the plaintiffs’ standing or prevent liability. The court stated that the management committee’s decision not to file the tax returns so as to let the LLC expire naturally in 2006 demonstrated that it was in no rush to terminate the legal rights of the LLC. The court pointed out that the plaintiffs could have sued at any time during the two-year period between the sale and the forfeiture and that they provided no explanation as to why they did not do so. Having concluded that the forfeiture precluded the members from filing a derivative suit, the court did not reach other issues and arguments raised in the case.

Mott v. Kirby

696 S.E.2d 304 (W. Va. 2010)

A member of an LLC sought partition and conveyance of a portion of real property owned by the LLC on the basis that the members had passed a motion to divide the property equally among the members and to work on submitting proposals at subsequent meetings to come up with an acceptable plan. The trial court applied the partition statute, and the appellate court held that the trial court erred in doing so. The West Virginia partition statute sets forth five forms of co-tenancy or co-ownership of property supporting jurisdiction of a circuit court to partition, and none of the forms were present here. Although the statute includes the situation where there are no more than five stockholders of a closely held corporation whose only substantial asset is real estate, the court distinguished between an LLC and a closely held corporation and stated that the circuit court incorrectly found that the parties were stockholders of a closely held corporation. The appellate court cited provisions of the West Virginia Uniform Limited Liability Company Act providing that a member is not a co-owner of, and has no transferable interest in, the property of an LLC, as well as provisions regarding a member’s distributional interest. The court contrasted the co-ownership of a corporate shareholder of a corporation. The court concluded that “a stockholder of a closely-held corporation possesses an ownership interest in the corporation, while a member of a limited liability company possesses no ownership interest in the limited liability company.” Based on the difference between a corporation and a closely held corporation and the fact that the partition statute does not list members of an LLC as co-owners over which a circuit court has jurisdiction in a partition suit, the appellate court held that the lower court did not have jurisdiction to partition the property. The court found no merit in the argument that the members dissolved the LLC at the meeting at which they agreed to divide the property and work on proposals to effectuate the division. According to the court, the statement at the meeting did not show an intent to immediately dissolve, the members continued to operate the LLC after the meeting, the members did not wind up the company in accordance with the statute, and there was no evidence that the existence of the LLC was terminated by filing articles of termination. The court also rejected the argument that the result would have been the same under the statutory provision concerning a member’s dissociation without a winding up and that any error by the lower court was thus harmless. There was no evidence of the fair value of the member’s distributional interest on which to order a purchase of the interest as provided by the statute, and the company’s assets included cash and receivables from the members in addition to the real property. The trial court’s order provided only for the division of the real property and did not take into account the LLC’s other assets. Essentially, the action before the court was an action by the member to dissociate, and the trial court applied the wrong statute by applying the partition statute. On remand, the appellate court directed that the action be conducted under the provision of the LLC statute concerning a member’s dissociation when the business is not wound up.

In re Kite Ranch, LLC (Powell Family of Yakima, LLC v. Dunmire)

234 P.3d 351 (Wyo. 2010)

The Dunmires, Brickmans, Hedstroms, and Powell were the members of a Wyoming LLC that purchased real property and operated a cattle ranch. The articles of organization recited that the members contributed a total of $1,000 initial capital, with 20% coming from Powell and 26.66% from each of the other members. Powell provided $300,000 for the purchase of the property, but approximately $220,000 was returned over time, leaving a capital account of approximately $80,000. The Dunmires provided approximately $415,000 to the LLC, but the LLC’s financial records reflected these amounts as loans to the LLC. The members never signed a written operating agreement. In this dispute among the members regarding their rights, the court addressed several questions under the Wyoming Limited Liability Company Act, including the following: (1) whether a party can be a member of an LLC without evidence of a contribution to capital; (2) whether economic and noneconomic rights of members vest in proportion to contributions to capital or pursuant to the articles of organization; and (3) whether Wyoming law recognizes a distinction between contributions to capital as initially listed in the articles of organization and as reflected on the books and records of the LLC. With regard to the first question, the court concluded that, with or without an operating agreement, a person may be a member of an LLC so long as his or her initial capital contribution or ownership interest is adequately identified in the original articles of organization or a subsequent amendment to the articles of organization. Although the articles of organization recited that cash contributions were being made by the Brickmans, Hedstroms, and Dunmires in the amount of $266.67 each and by Powell in the amount of $200, Powell argued that no one but Powell ever became a member of the LLC because there was no evidence that the others actually made a capital contribution. Based on the articles of organization and communications between the parties, the court concluded that it was clear that the Dunmires, Hedstroms, Brickmans, and Powell were intended to be the members. The court also concluded that the statutes did not support the proposition that a person cannot be a member until the person has actually paid an initial capital contribution. If payment of an initial capital contribution were to be seen as a prerequisite to membership, the court stated that the issuance of the certificate of organization conclusively established that the requirement was met because the statute provides that the certificate of organization is “conclusive evidence that all conditions precedent required to be performed by the member have been complied with....” With respect to the second question, the court concluded that a member’s management rights and economic rights are determined in different ways under the statute in the absence of provisions addressing these matters in an operating agreement. The court concluded that the management rights are determined by the capital contribution or percentage of a member as it is then reflected in the articles of organization unless otherwise provided by an operating agreement. According to the court, additional contributions that are not reflected in an amendment to the articles of organization do not change the members’ management rights. Thus, the management rights of the members in this LLC were proportional to their 20/26/26/26 percentages stated in the articles of organization. On the other hand, the court determined that the members’ rights to profits and losses and distributions are determined in accordance with the value of the members’ contributions unless otherwise provided by an operating agreement. The court concluded that this statutory default rule did not apply in this case, however, because the undisputed evidence (which included loan documents, tax returns, and a course of dealing) pointed toward an oral operating agreement under which the members allocated profits and losses in accordance with the initial capital structure. With respect to the third question, the court concluded that, as discussed above, Wyoming law recognizes a distinction between contributions to capital as initially or subsequently listed in the articles of organization and contributions to capital that my be reflected in a member’s capital or equity account. In this case, Powell argued that his management and distributive rights should be tied to total capital contributions because his capital contribution dwarfed that of the other members. The court explained, however, that its conclusion that the members’ rights were determined by the initial capital structure and that Powell’s additional capital was viewed as capital that was to be repaid, rather than capital in the ownership or management sense, was not unreasonable in light of the evidence that the other members guaranteed the loan on the LLC’s property, that the Dunmires lent a substantial amount to the LLC, and that Powell became a member because the bank insisted on his contribution being capital rather than a loan.

Delamater v. Anytime Fitness, Inc.

722 F.Supp.2d 1168 (E.D. Cal. 2010)

(effect of conversion of Minnesota corporation to Minnesota LLC under California law).

Chantz Enterprises, LLC v. JHL Brighton Design/Decor Center, LLC

C.A. No. 09C-06-072 MJB, 2010 WL 2642885 (Del. Super. June 30, 2010)

(capacity of forfeited and reinstated LLC to sue).

Taurus Stornoway Investments, LLC v. Kerley

38 So.3d 840 (Fla. App. 2010)

(enforceability of forum selection clause specifying Massachusetts forum with respect to judicial dissolution of Florida LLC).

Longview Aluminum, L.L.C. v. Brandt

431 B.R. 193 (N.D. Ill. 2010)

(per se insider status of member of Delaware LLC).

Iron Mound, LLC v. Nueterra Healthcare Management, LLC

234 P.3d 39 (Kan. App. 2010)

(fact issue as to survival of provisions of LLC operating agreement after dissolution and filing of certificate of cancellation of LLC).

Hospitality Consultants, LLC v. Angeron

41 So.3d 1236 (La. App. 2010)

(lack of standing of parties to LLC operating agreement to bring derivative action and breach of fiduciary duty claims where parties were not issued units and did not become members).

Della Ratta v. Dyas

996 A.2d 382 (Md. 2010)

(exclusive jurisdiction of circuit court of county of LLC’s principal office to order judicial dissolution).

Casella v. Home Depot USA, Inc.

Civil Action No. 09-0421 (JAP), 2010 WL 3001919 (D.N.J. July 28, 2010)

(inapplicability of shareholder oppression provision of New Jersey Business Corporation Act to LLC).

Centro Empresarial Cempresa S.A. v. America Movil S.A.B. de C.V.

901 N.Y.S.2d 618 (App. Div. 1st Dept 2010)

(effect of release signed by minority members as barring fraud claim against majority member notwithstanding fiduciary status of majority member).

In re Carolina Park Associates, LLC

430 B.R. 744 (Bankr. D.S.C. 2010)

(dismissal of unauthorized bankruptcy filing notwithstanding release signed by one member of two-member LLC where operating agreement required joint consent of members).