December 2009 — Issue 46

LLP Cases: In re Promedicus Health Group, LLP (Wallach v. Douglas)

416 B.R. 389 (Bankr. W.D.N.Y. 2009)

In this dispute over what definition of “insolvent” applies to a New York LLP under the Bankruptcy Code, the court determined that there are no “general partners” in a New York LLP so that the provision requiring “the sum of the excess of the value of each general partner’s non-partnership property” to be added to the assets of the LLP did not apply. The trustee argued that the definition of a corporation in Section 101(9)(A)(ii) applied to the LLP because the term includes a “partnership association organized under a law that makes only the capital subscribed responsible for the debts of such association.” The defendants argued that the provision of the New York statute specifying that partners have liability for their own negligent or wrongful act or misconduct or that of any person under their direct supervision and control does not make only the capital subscribed responsible for the debts of the association. Further, the defendants argued that an LLP must consist of general partners because the New York statute specifies that an LLP is a partnership without limited partners. The court stated that it was incorrect to think of the “universe” of partnerships in New York as consisting only of general partnerships and limited partnerships, and, consequently, it was incorrect to think of the universe of partners as only general partners and limited partners. The court analyzed the language of the New York LLP statute and stated that the universe of partners in New York consists of general partners, limited partners, and partners in a registered LLP. Because the defendants were of the last type, they could not avail themselves of the provision in the Bankruptcy Code calling for inclusion of the assets of each general partner in determining insolvency of the LLP. Further, the court stated that it would reach the same result using the test set forth in Collier on Bankruptcy in discussing LLPs, under which it is posited that the degree of liability protection should determine whether the entity is a corporation under the definition in Section 101. In sum, the court determined that the partnership definition of insolvency in the Bankruptcy Code applied, but that there were no general partners in an LLP. Alternatively, based on the substance of the liability protection under the New York LLP statute, the court concluded that the corporate definition would apply.

LLC Cases: Choice Hotels Int’l, Inc. v. Columbus-Hunt Park Dr. BNK Investors, L.L.C.

C.A. No. 4353-VCP, 2009 WL 3335332 (Del. Ch. Oct. 15, 2009)

The defendants sought a stay of this proceeding in which the plaintiff, Choice Hotels International, Inc. (“Choice”), sought a determination, under Section 18-110 of the Delaware LLC statute, of the rightful manager of a single purpose Delaware LLC owning property in Ohio. Choice asserted that it validly removed Klein from his position as the sole manager of the LLC and that Choice was the manager of the LLC. In two separate suits filed in Maryland, Choice sued the LLC and Klein, and the LLC and Klein sued Choice. These suits related to loans from Choice to Klein pursuant to which Klein pledged his interest in the LLC as security for the loans. Klein allegedly defaulted on the loans, and Choice purported to foreclose on Klein’s membership interest in the LLC, remove Klein as the manager of the LLC, and appoint itself as the replacement manager. Choice contended that the statutory policy behind a summary action under Section 18-110 of the Delaware LLC statute superseded application of the conventional McWane analysis giving preference to a first-filed action and that Section 18-110 required the court to give precedence to the summary Delaware action. Section 18-110 provides that the Court of Chancery “may hear and determine the validity of any admission, election, appointment, removal or resignation of a manager of a limited liability company, and . . . may determine the person or persons entitled to serve as managers . . . .” The court noted that the purpose of Section 18-110 is “to expeditiously resolve uncertainty” within an LLC. Thus, the Court of Chancery will ordinarily deny a motion to stay a Section 18-110 action. However, citing Delaware precedent, the court acknowledged that when faced with a request to stay a summary action, the court balances the McWane policies of comity and promotion of the efficient administration of justice against the policies underlying the summary nature of the Delaware action. Under the McWane doctrine, an action will be stayed if the following three questions are answered in the affirmative: (1) whether there is a prior action pending elsewhere related to the action in Delaware; (2) whether such other suit involves the same parties and issues; and (3) whether the foreign court is capable of doing prompt and complete justice. The court answered each of these questions in the affirmative and further found that there was a significant risk that proceeding with the Delaware action would unnecessarily waste time, effort, and expense or result in inconsistent and conflicting rulings. The court thus held that the McWane policies of comity and the orderly and efficient administration of justice supported granting a stay of the Delaware action. The court next considered whether the balance of potential harms weighed in favor of staying or not staying the action. The court noted that the LLC had just one asset, and that the LLC could be expected to maintain its business as usual during the Maryland action. Thus, the court concluded that, under the circumstances, the first-filed rule applied and principles of comity and promoting the efficient administration of justice required that the Delaware action be stayed.

Skylake Insurance Agency, Inc. v. NMB Plaza, LLC

23 So.3d 175 (Fla. App. 2009)

The court held that a ten-year commercial lease did not satisfy a Florida statute applicable to conveyances of real property because it lacked two subscribing witnesses as required by the statute for a lease of more than one year. Though the lease was properly executed under the Florida LLC statute, the court agreed with the views of the Real Property, Probate and Trust Law Section of the Florida Bar expressed in its amicus curiae brief and held that the lease must also comply with the statutory two-witness requirement. Recognizing that an LLC is not a corporation, the court rejected the argument that an exception in the statute for corporations applied to the LLC. The court also agreed with the amicus argument that the bare failure of the landlord to have his signature witnessed does not give rise to an estoppel because such a result would effectively render the statutory two-witness requirement unenforceable. Thus, the court of appeals affirmed the trial court’s denial of specific performance. The court determined, however, that the lessee might still have a claim for breach of contract against the landlord, citing case law that permitted a party under some circumstances to pursue a claim for damages under a deed or lease that was defective under the statute requiring two witnesses where the document otherwise complied with the requirements of the statute of frauds.

JD Factors, LLC v. Freightco, LLC

Cause No. 1:09-CV-95, 2009 WL 3401965 (N.D. Ind. Oct. 16, 2009)

The defendant LLC sought to amend its answer in a collection suit to assert that a member’s bankruptcy resulted in his dissociation and termination as vice-president and that his remaining rights as a member or former member now belonged to his bankruptcy trustee. The plaintiff argued that the defendant should be denied leave to amend on the basis that the proposed amendment was contrary to law. The plaintiff argued that the amended allegations violated the automatic stay provisions and were premised on an ipso facto clause prohibited by Section 365(e)(1). The court rejected the plaintiff’s arguments, noting that the bankrupt member’s services as vice-president may well be more akin to a personal services contract than an executory contract that is freely assignable to the trustee. The court stated that the plaintiff did not cite any authority for its assertion that service as an officer of a company rises to the level of “property” of the bankruptcy estate. The court found it reasonable to infer that the member’s termination as vice-president did not violate the automatic stay. Additionally, the court stated that the ipso facto clause in the operating agreement was not necessarily unenforceable given that the Indiana LLC statute provides that no person can become a member without the consent of all members unless otherwise provided in the operating agreement. In any event, the plaintiff did not challenge the statement in the proposed amendment that the bankrupt member’s remaining rights as a member inure to the bankruptcy trustee. Thus, the court concluded that the proposed amendment was not “contrary to law” and that leave to amend should be granted.

People v. Highgate LTC Management, LLC

887 N.Y.S.2d 298 (App. Div. 3rd Dept. 2009)

An LLC that operated a rehabilitation and extended care facility was convicted of various crimes based on the failure of the LLC’s employees to provide required care to a patient and falsification of records regarding such care. The court held that an LLC can be held criminally responsible for the acts of its employees committed in the scope of employment. The LLC argued that the doctrine of respondeat superior does not apply to crimes that require specific intent and that the statutory provision of the Penal Code making respondeat superior applicable to corporations must be strictly construed and cannot apply to unincorporated associations such as LLCs. The court rejected these arguments, relying on case law involving corporations and unincorporated associations. Though the court acknowledged that the Penal Code provision applying respondeat superior liability to corporations is inapplicable to an LLC, the court stated that “long-standing analogous principles that have evolved through case law remain dispositive.”

Hegarty v. Commissioner of Internal Revenue

T.C. Summ. Op. 2009-153, 2009 WL 3188789 (U.S. Tax. Ct. Oct. 6, 2009)

(application of passive activity rules to LLC member).

Mitchell Company, Inc. v. Campus

Civil Action No. 08-0342-KD-C, 2009 WL 3527744 (S.D. Ala. Oct. 23, 2009)

(interpretation of withdrawal and buyout provisions of LLC agreements).

DC Xpress, L.L.C. v. Briggs

__ S.W.3d __ 2009 WL 3199213 (Ark. App. 2009)

(standards for breach of fiduciary duty by LLC manager/CEO).

Longhi v. Mazzoni

914 N.E.2d 834 (Ind. App. 2009)

(undercapitalization and manager’s use of LLC to promote fraud as basis to pierce LLC veil).

Junge v. Bartles

Docket No. 285035, 2009 WL 3365842 (Mich. App. Oct. 20, 2009)

(analysis of LLC member’s claims for conversion of membership interest and oppression).

In re Beatrice Biodiesel, LLC (Lange v. Home Federal Savings Bank)

Bankruptcy No. BK08-41927-TLS, Adversary No. A09-4009-TJM, 2009 WL 3255087 (Bankr. D. Neb. Oct. 7, 2009)

(authority to sign deed of trust on behalf of LLC).

Carcano v. JBSS, LLC

684 S.E.2d 41 (N.C. App. 2009)

(analysis of breach of contract, constructive trust, and unfair and deceptive practices claims arising out of investment in non-existent LLC).

Arime Pty, Ltd. v. Organic Energy Conversion Company, LLC

No. C09-5436BHS, 2009 WL 3484062 (W.D. Wash. Oct. 26, 2009)

(personal liability of member or manager for member’s or manager’s own torts).

Glenn Seed Ltd. v. Vannet

No. 09-cv-309-slc, 2009 WL 3712663 (W.D. Wis. Nov. 4, 2009)

(continuation of LLC existence after dissolution until completion of winding up).

Felton v. Teel Plastics, Inc.

664 F.Supp.2d 937 (W.D. Wis. 2009)

(member’s lack of standing to bring breach of fiduciary duty claim belonging to LLC).