February 2006 — Issue 1

In re Paul J. Ferrigan Revocable Trust

2005 WL 2372082 , No. 254772 (Mich. App. Sept. 27, 2005)

The sole member of an LLC died, and the court held that the operating agreement, which was entered prior to amendment of the Michigan LLC statute to permit single member LLCs, was invalid. The court concluded that the amendment permitting single member LLCs and operating agreements did not have retroactive effect, and the provision of the statute stating that LLCs are bound by changes to the statute did not validate the agreement. The court also rejected the argument that the operating agreement should be viewed as a valid governing document akin to bylaws even if not a valid statutory operating agreement.

D.R. Horton Inc.-New Jersey v. Dynastar Development, L.L.C.

2005 WL 1939778, No. MER-L-1808-00 (N.J. Super. L. Aug. 10, 2005)

The plaintiff was unsuccessful in piercing the veil of a New Jersey LLC in this breach of contract action. The opinion contains a lengthy discussion and analysis of veil piercing as applicable to LLCs, and the court concluded that the traditional approach to veil piercing in the corporate context should not be mechanically applied to LLCs. The court noted the absence of New Jersey case law expressly addressing how corporate veil piercing principles apply to LLCs and reviewed the statutory and judicial treatment of LLC veil piercing in other states. Since the New Jersey LLC statute does not address veil piercing of LLCs, the court concluded the statute endorses the evolution of court-made rules tailored to the LLC’s special attributes. The court agreed with judicial opinions and commentators that have concluded LLC veil piercing law should be adapted to the special characteristics of LLCs. The court identified adherence to corporate formalities, dominion and control by the owner, and undercapitalization as factors that should be weighed differently in the LLC context. Though the court declined to formulate a generally-applicable standard for LLCs, the court concluded that these factors “should not loom as large” in this case as in the case of a corporation. In rejecting the plaintiff’s attempt to hold an individual member/manager of an LLC member of a New Jersey LLC personally liable for the breach of contract of the New Jersey LLC, the court noted that the individual did not intentionally mislead the plaintiff or hide the LLC’s role, and the court pointed out the plaintiff made no effort to inquire regarding the LLC’s role in the transaction. Given the lesser weight assigned to formalities and dominion and control, the court did not find the individual’s inattention to detail (e.g., misuse of stationery) and operational efficiencies (such as use of a central office for his various business entities) justified piercing the LLC’s veil. The court also concluded there was no evidence that the plaintiff’s confusion caused the plaintiff to act to its detriment or that the LLC form was used to perpetrate any injustice.

In re Brentwood Golf Club, LLC

329 B.R. 802, Bankruptcy No. 04-54286, Adversary No. 05-4098 (Bankr. E.D. Mich. 2005)

The court determined that an LLC debtor and its related LLC were alter egos and that the veil of the related LLC would thus be pierced so that the assets of the related LLC were property of the bankruptcy estate. The court also determined that the doctrine of substantive consolidation applied to the two LLCs.

Brant v. Krilich

835 N.E.2d 582, No. 45A03-0411-CV-514 (Ind. App. 2005)

A judgment debtor with interests in various businesses, including a number of LLCs, appealed after the judgment creditor obtained a garnishment order against bank accounts of the businesses and an order transferring the judgment debtor’s ownership interests in the businesses. The court discussed the judgment debtor’s argument that a charging order is the exclusive remedy with respect to a judgment debtor’s interest in an LLC and concluded that a member’s interest in an LLC is personal property that is subject to execution under Indiana law but stressed that the property that is subject to execution is only the economic interest and not the membership in the LLC. The court stated that the judgment creditor could not through execution receive any of the judgment debtor’s rights to participate in management nor could it inspect the books and records of the LLC. The court also noted that an assignee may not become a member without consent of all other members and found no reason the courts should disregard this rule by forcing the members of an LLC to accept a judgment creditor as a member. The court characterized execution as indistinguishable from a charging order and stated that the effect of the law was that a charging order is essentially the only remedy for a judgment creditor against a member’s interest in an LLC.

Ross v. National Center for Employment of the Disabled

170 S.W.3d 635, No. 08-04-00001-CV (Tex. App. 2005)

A $10 million default judgment was taken in Texas state court against Ross, the sole member of two Arizona LLCs. The plaintiff sought a turnover order requiring Ross to turn over a $1.2 million letter of credit owned by the LLCs. The plaintiff claimed that Ross, as owner of the LLCs, controlled the $1.2 million letter of credit, and that the statutory criteria for a turnover order were met: (1) the property could not be readily attached or levied upon by ordinary legal process, and (2) the property was not exempt from attachment, execution, or other seizure. The LLCs were not joined as parties nor was it alleged that the LLCs were the alter ego of Ross. Ross argued that the turnover order could not issue without initiation of proceedings against the LLCs. The court of appeals reviewed the case law dealing with turnover proceedings and non-judgment debtors and found no abuse of discretion in the trial court’s issuance of the turnover order for the letter of credit. Although the Texas Limited Liability Company Act contains charging order provisions, there is no mention of these provisions in the case, nor does the court discuss the difference between an LLC interest and corporate stock when relying on cases dealing with corporate stock ownership.

Ishimaru v. Fung

2005 WL 2899680, No. Civ.A. 929 (Del. Ch. Oct. 26, 2005)

An LLC member sought to prosecute a derivative claim against an entity (Ivy Asset Management Corp. or “Ivy Asset”) on the basis that the LLC’s managing/majority member would not fairly consider whether to pursue the claim. Applying the same demand futility test that is applied in the corporate context, the court held that the plaintiff member was entitled to pursue the derivative claim because her complaint articulated particularized facts demonstrating that the managing member was incapable of disinterestedly determining whether to pursue the claim. The claim against Ivy Asset, however, was subject to an arbitration clause in an agreement between the LLC and a subsidiary of Ivy Asset, and the court thus granted Ivy Asset’s motion to dismiss.

Godfrey v. LaFavour

2005 WL 2340714, No. J05-005 CV JWS (D. Alaska Sept. 16, 2005)

Breach of fiduciary duty; existence of contract between LLC members in absence of written operating agreement; direct versus derivative claims

Premier Capital LLC v. Dickens

2005 WL 2338789, No. G034429 (Cal. App. 4 Dist. Sept. 23, 2005)

Transaction of intrastate commerce for purposes of foreign qualification requirement

Ventres v. Goodspeed Airport, LLC

881 A.2d 937, 275 Conn. 105, No. 17280 (Conn. 2005)

Personal liability of member for own tortious conduct

Milford Paintball, LLC v. Wampus Milford Assoc., LLC

2005 WL 2363793, No. CV0540075S (Conn. Super. Aug. 25, 2005)

Fiduciary shield doctrine and exercise of personal jurisdiction over member on basis of member’s tortious activity

Terex Corporation v. STV USA, Inc.

2005 WL 2810717, No. Civ.A. 1614-N (Del. Ch. Oct. 20, 2005)

Judicial dissolution and scope of LLC agreement arbitration clause

Wright v. Herman

230 F.R.D. 1, No. 05-0324 (RMU) (D. D.C. 2005)

Direct versus derivative claims; LLC as indispensable party; conflict of laws and internal affairs doctrine; nature of LLC membership interest

Alimenta (USA), Inc. v. Oil Seed South, LLC

622 S.E.2d 363, Nos. A05A1035, A05A1036 (Ga. App. 2005)

Interpretation of operating agreement provisions regarding capital contributions, member loans, member guaranties, and indemnity; impact of operating agreement on fraudulent inducement claim

Thorpe v. Levenfeld

2005 WL 2420373, No. 04 C 3040 (N.D. Ill. Sept. 29, 2005)

Fraudulent inducement, breach of fiduciary duty, equitable accounting, statute of frauds

Sykes v. Hengel

394 F.Supp.2d 1062, No. 4:03 CV 40526 (S.D. Iowa 2005)

Limited liability of managers; qualified privilege with respect to tortious interference with contract claim

Rupp v. Thompson

2004 WL 3563775, No. C5-03-347 (Minn. Dist. Ct. March 17, 2004)

Conflict of laws and internal affairs doctrine

Grand Street Realty, LLC v. McCord

2005 WL 2436214, No. 04-CV-4738 (E.D. N.Y. Sept. 30, 2005)

Nature of LLC ownership interest and access of bankruptcy trustee in debtor member’s bankruptcy to LLC property

State v. NCCS Loans, Inc.

2005 WL 3287220, No. COA04-1660 (N.C. App. 2005)

Personal liability of LLC managing member for member’s own acts or conduct

Roemmich v. Eagle Eye Development, LLC

386 F.Supp.2d 1089, No. A1-04-79 (D. N.D. 2005)

Application of statute of limitations to breaches of fiduciary duty; statutory grounds for equitable relief of fair market value of interest; exceptions to limited liability of members and officers

Swift Freedom Aviation, LLC v. R.H. Aero

2005 WL 2246256, No. 1:04-CV-90 (E.D. Tenn. Sept. 13, 2005)

Standing of members to assert claims based on LLC property; personal liability of individual owner of LLC or corporation based on veil piercing or agency principles

White Family Harmony Investment, Ltd. v. Transwestern West Valley, LLC

2005 WL 2893784, No. 2:05CV495 DAK (D. Utah Oct. 31, 2005)

Alter ego veil piercing of LLCs in liability and personal jurisdiction contexts