LLPs: iCore Networks, Inc. v. McQuade Brennan LLP
No. 1:08CV748(JCC), 2009 WL 36596 (E.D. Va. Jan. 5, 2009).
A partner of a District of Columbia LLP accounting firm moved to dismiss professional malpractice and breach of fiduciary duty claims against him in his individual capacity. In an earlier opinion, the court found that the plaintiff had not sufficiently alleged an individual duty separate and apart from the duty of the LLP, and the partner was protected from vicarious liability by the D.C. LLP statute. The main issue addressed by the court in this opinion was whether the plaintiff’s amended complaint alleged a duty on the part of the partner that would allow him to be liable in his individual capacity. The court found that it did. The plaintiff was suing the firm for embezzling funds from the plaintiff by overcharging for services, charging for unperformed services, and forging and cashing checks. To conceal the embezzlement, an individual or individuals at the firm created false invoices and made alterations of the plaintiff’s books and records. The firm alleged that one individual carried out the scheme acting alone; however, the plaintiff sought to hold one of the partners, McQuade, personally liable. The court reviewed the amended allegations and found that, liberally construed, they alleged a duty on the part of McQuade in his individual capacity. The complaint stated that McQuade reviewed the work done by the alleged embezzler and assured the plaintiff that the work had been done properly. The alleged assurances were given at a time when the firm was negotiating a long-term accounting services contract with the plaintiff. The court stated that it may have been reasonable for McQuade to assume that the long-term engagement depended upon the outcome of the check reconciliations and assurances provided by McQuade. Thus, there was a plausible claim that McQuade’s actions violated a duty of reasonable care and led, in whole or in part, to the damages suffered by the plaintiff. The claim for professional malpractice thus survived. The court noted that courts do not generally regard the accountant-client relationship as a fiduciary one, but concluded that the allegations supported a breach of fiduciary duty claim as well.
Civil Action No. 3017-CC, 2009 WL 73957 (Del. Ch. Jan. 13, 2009).
Fisk Ventures, LLC (“Fisk”), a Class B member of Ginitrix, LLC (“the LLC”), sought judicial dissolution of the LLC under the Delaware LLC statute. The LLC was formed to commercialize biotechnology concepts of the founder. Segal, the founder of the LLC and the sole Class A member, opposed dissolution. Under the LLC agreement, the LLC’s board could only act pursuant to approval of 75% of the members of the board, which consisted of two members appointed by Segal and two members appointed by Fisk. The LLC agreement provided that the LLC would be dissolved upon the written consent of members holding 75% of the membership interests or entry of a judicial decree of dissolution. Segal’s opposition prevented the requisite vote for dissolution, and judicial dissolution was the only other possible means of dissolution. The board had a long history of deadlock, and the LLC had no office, no capital funds, no grant funds, and generated no revenue. Under these circumstances, the court found ample cause to order dissolution under the Delaware LLC statute, which authorizes a court to decree judicial dissolution when it is not reasonably practicable to carry on the business in conformity with the LLC agreement. The court looked to case law in the limited partnership context for guidance on the standard for judicial dissolution and concluded that there was no need to show that the purpose of the LLC was “completely frustrated.” The court stated that relevant factors in applying the “reasonably practicable” standard include the following: (1) member vote deadlocked at the board level; (2) the operating agreement gives no means of navigating around the deadlock; and (3) due to the financial condition of the company, there is effectively no business to operate. According to the court, none of these factors is individually dispositive, and they need not all be present, but the court proceeded to find each factor present in this case. The 75% approval requirement under the LLC agreement resulted in hopeless deadlock, and there was no “tie-breaking” mechanism under the agreement. Given the long history of discord, the court did not believe the parties would ever be able to harmoniously resolve their differences. Segal argued that Fisk’s put right under the LLC agreement was a mechanism for resolving the situation since it provided an exit right to Fisk; however, Fisk was not required to exercise its put right, and there was no mechanism to force it to sell. The court stated that it was not permitted to second guess a party’s business decision in choosing whether or not to exercise its negotiated option rights. The court next discussed the dire financial condition (no office, no capital funds, and no revenue) of the LLC. Segal argued that the LLC had been unable to raise funds due to Fisk’s refusal to allow further capital infusions without significant anti-dilution provisions. Segal further contended that the LLC would be free to raise funds to effect the buy-out of Fisk if Fisk were forced to exercise its put right. The court stated that it would not substitute its business judgment for that of Fisk simply because Segal believed it to be in his best interest. Segal also argued that dissolution would destroy any value preserved in a patent license held by the LLC, but the court was not convinced that any potential value could not be accessed through a fair and proper sale of the asset. The court also rejected Segal’s argument that Fisk was barred by unclean hands from seeking judicial dissolution. The court stated that Fisk was free to exercise its leverage under the LLC agreement, and the court was in no position to redraft the LLC agreement for these sophisticated and well-represented parties. In view of the deadlock and dire financial straits that left the LLC with no reasonable means to operate its business, the only remedy available was dissolution.
Civil Action No. 3751-CC, 2008 WL 5272861 (Del. Ch. Dec. 5, 2008)
The court interpreted provisions of an LLC operating agreement regarding procedures to nominate directors to be conditions rather than promises. As such, a nomination that failed to comply with the provision did not constitute a “breach” of the agreement for purposes of a provision that indemnified the LLC for costs and expenses, including attorney’s fees, arising from a shareholder’s breach of any provision of the LLC agreement. The nomination procedures described the requirements for a proper and timely notice of nomination of a person for election to the board of directors of the LLC. The court concluded that these requirements were conditions to nominating a person for election and not promises by shareholders. The presence of words such as “must” and “shall” did not compel a finding that the notice requirements were promises, and no particular label is required for a condition. The submission of a non-compliant notice meant that the shareholders’ attempted nominations failed but did not render the shareholders personally liable under the LLC agreement or constitute a breach triggering the indemnification provision. Kertesz v. Spa Floral, LLC, 994 So.2d 473 (Fla. App. 2008). After being ousted as managing member, the founder of an LLC sued for judicial dissolution of the LLC (based on an alleged deadlock in management), appointment of a receiver, and compensation for the loss in value of his membership interest (based on the other members’ alleged breach of their duty of care to the plaintiff). Noting that the complaint did not refer to or include any articles of organization or operating agreement, the court relied upon the Florida LLC statute and decisional law and stated that governance and operation of the LLC is a simple matter of majority rule in the absence of other written terms. The court rejected the argument that there was a deadlock because there was no impasse. The majority had the right to replace the plaintiff as the managing member, and the majority voted to do so. In the absence of a deadlock, there were no grounds for judicial dissolution or receivership. The court also held that the decline in value of the plaintiff’s LLC interest was not actionable without more. The court stated that the plaintiff’s allegation that the LLC lost business because of his removal called into question the wisdom or business judgment of the majority, and the members could not be sued simply because they exercised their prerogative to change management in the absence of some wrongful or unlawful basis, such as prohibited discrimination or circumstances detailed in whistleblower statutes. The decision to replace the plaintiff did not constitute misappropriation or waste just because some clients of the LLC disapproved. The court stated that the business decision to replace the plaintiff might prove sound over a longer term, and, if it did not, a change of management that ultimately proves to be improvident does not of itself give rise to a cause of action against the majority who voted for it or the LLC.
994 So.2d 473 (Fla. App. 2008)
After being ousted as managing member, the founder of an LLC sued for judicial dissolution of the LLC (based on an alleged deadlock in management), appointment of a receiver, and compensation for the loss in value of his membership interest (based on the other members’ alleged breach of their duty of care to the plaintiff). Noting that the complaint did not refer to or include any articles of organization or operating agreement, the court relied upon the Florida LLC statute and decisional law and stated that governance and operation of the LLC is a simple matter of majority rule in the absence of other written terms. The court rejected the argument that there was a deadlock because there was no impasse. The majority had the right to replace the plaintiff as the managing member, and the majority voted to do so. In the absence of a deadlock, there were no grounds for judicial dissolution or receivership. The court also held that the decline in value of the plaintiff’s LLC interest was not actionable without more. The court stated that the plaintiff’s allegation that the LLC lost business because of his removal called into question the wisdom or business judgment of the majority, and the members could not be sued simply because they exercised their prerogative to change management in the absence of some wrongful or unlawful basis, such as prohibited discrimination or circumstances detailed in whistleblower statutes. The decision to replace the plaintiff did not constitute misappropriation or waste just because some clients of the LLC disapproved. The court stated that the business decision to replace the plaintiff might prove sound over a longer term, and, if it did not, a change of management that ultimately proves to be improvident does not of itself give rise to a cause of action against the majority who voted for it or the LLC.
58 A.D.3d 270, 869 N.Y.S.2d 61 (N.Y. App. Div. 1st Dept. 2008)
In an action to enforce personal guaranties of the defendants, the plaintiff obtained an ex parte attachment of the defendants’ membership interests in numerous Delaware, Georgia, and Florida LLCs and a subsequent order conditionally appointing a receiver for the interests. The appellate court vacated the orders because the res in an attachment proceeding must be within the jurisdiction of the court issuing the attachment. Although the defendants voluntarily submitted to the jurisdiction of any court in New York City pursuant to the terms of the guaranty, and the order of attachment was served on one of the defendants who was in New York temporarily, the court stated that it was undisputed that neither the defendant served with the order nor any of the other nondomiciliary defendants or entities in which they had an attachable interest had any tangible or intangible property in New York. The court stated that an LLC is a hybrid of a corporation and limited partnership and that owners of membership interests not represented by certificates in an LLC should have rights comparable to those of corporate shareholders and limited partners. The court stated that “the situs of shares of a corporation is either ‘where the corporation exists’ or where the shareholders are domiciled,” and the court cited case law holding that “an interest in a limited partnership–as with a corporation–is situated where the partnership is formed and operates.” The court rejected the argument in the dissent that the New York court had jurisdiction to order attachment of the interests based on the proposition that the situs of a debt is wherever the debtor can be found. With respect to the receivership, the court stated that a court should decline to appoint a receiver where a judgment relates strictly to the internal affairs and management of a foreign corporation or LLC because such questions are of local administration and should be relegated to courts of the jurisdiction under the laws of which the corporation or LLC is organized. According to the court, “[i]nstead of appointing a receiver of defendants’ ownership and/or management interests in the foreign entities with the power to assume any management role they may have in those entities and authorizing him to seek the aid of courts of those states in which the real estate is located in executing his duties as receiver, plaintiff, now the judgment creditor, should have been relegated to the states of the companies’ situses where it could have receivers appointed upon a proper showing of necessity.” The court affirmed that part of the trial court’s order restraining the defendants from transferring or otherwise disposing of their assets, including their interests in the nondomiciliary LLCs.
Blue Water Sunset, LLC v. First View, LLC
No. B204012, 2008 WL 5394933 (Cal. App. 2 Dist. Dec. 9, 2008)
(application of corporate principles regarding derivative suits to LLCs; rejection of reverse veil piercing under California law)
Holmes v. United States
No. CV07-421-S-EJL, 2009 WL 35175 (D. Idaho Jan. 5, 2009)
(validity of chain of title containing conveyances by foreign LLCs that did not register to transact business)
No. 1:07-cv-0424-DFH-WGH, 2009 WL 77679 (S.D. Ind. Jan. 9, 2009)
(interpretation of contract permitting assignment of lease to specified individuals “in any business association” as encompassing LLC and protecting individuals from liability; application of corporate veil piercing principles to LLC and absence of summary judgment evidence to support piercing LLC veil)
No. 2007-CA-002523-MR, 2008 WL 5429542 (Ky. App. Dec. 31, 2008)
(discussion of distinction between assignment of LLC interest and admission to membership under Kentucky LLC statute and sufficiency of evidence to support oral assignment of “ownership” in LLC)
999 So.2d 311 (La. App. 2008)
(application of corporate principles regarding fiduciary duties and derivative suits in view of similarity between Louisiana corporate and LLC statutes; sufficiency of allegations to satisfy gross negligence and intentional breach of duty of loyalty standards)
Krueger v. Zeman Construction Company
758 N.W.2d 881 (Minn. App. 2008)
(legitimacy of decision to conduct business as LLC to avoid personal liability; lack of standing to sue for business discrimination in performance of contract under Minnesota Human Rights Act where LLC rather than individual entered contract)
In re Martinez (Humphries v. Martinez)
Bankruptcy No. 08-41344-13-abf, Adversary No. 08-4111-13-abf, 2008 WL 5157707 (Bankr. W.D. Mo. Aug 1, 2008)
(absence of express or technical trust constituting fiduciary relationship between LLC members for purposes of Bankruptcy Code exception to discharge for fraud or defalcation in fiduciary capacity)
No. 08CA3, 2008 WL 5244993 (Ohio App. Dec. 16, 2008)
(order of payment of assets in LLC liquidation; application of case law addressing fiduciary duties of majority shareholders to minority shareholders in context of claims that majority member breached fiduciary duties by taking over LLC and utilizing business for personal gain)
Humphrey Industries Ltd. v. Clay Street Associates LLC
No. 60923-8-I, 2008 WL 5182026 (Wash. App. Dec. 8, 2008)
(interpretation and application of Washington LLC dissenter’s right statute with regard to fair value, time-frame for payment and filing suit, substantial compliance; vexatious conduct of dissenting member)
No. 2008AP512, 2009 WL 80244 (Wis. App. Jan. 14, 2009)
(absence of grounds for judicial dissolution of LLC where alleged fraudulent or wasteful conduct (failure of LLC to collect rent from another business owned by certain LLC members) was in accordance with separate forbearance agreement to which petitioning member was party)