January 2007 — Issue 11

Chamberlain v. Irving

No. 4001394, 2006 WL 3290446 (Conn. Super. Oct. 26, 2006)

Limited liability of partners of LLP even if designator is not used and third party does not know partnership is LLP.

J.R. Simplot Company v. Bosen

__ P.3d __, No. 31706, 2006 WL 3409103 (Idaho 2006)

An individual, Bosen, was held liable under a commercial sales agreement he claimed he signed on behalf of an LLC. Bosen purchased land with another individual, Achs, and Achs formed an LLC to operate a hog farm on the property. Bosen completed a form commercial sales agreement to obtain services and products for chemical and fertilizer applications to the farm property. In completing the sales agreement, Bosen listed the LLC’s name as the “customer account name” and checked the box designated “LLC” to indicate the “type of ownership.” He listed the “principals names & titles” as Achs and Bosen. He listed “5100" acres in the box entitled “acres owned.” Since the LLC did not own any real property, the 5,100 acres could only refer to the property purchased by Bosen and Achs. At the bottom of the sales agreement was a paragraph entitled “agricultural business agreement” in which the “applicant” agreed to pay the total amount due on each invoice. The form did not specify whether the applicant was also the customer. In the box for “applicant’s signature,” Bosen wrote his name without indicating that he was signing in a representative capacity. Bosen also signed a security agreement and financing statement without designating any representative capacity. The security agreement and financing statement listed both Bosen and the LLC as debtors. The security agreement granted a security interest in the crops grown on the real property. The Idaho Supreme Court upheld the district court’s summary judgment against Bosen on the basis that Bosen signed the commercial sales agreement in his individual capacity. Bosen claimed that there was a material fact issue as to his status as a member of the LLC and, as such, his protection from liability under the Idaho LLC statute. The court stated that it was immaterial whether Bosen was a member of the LLC because he was being held liable for a debt he personally incurred rather than as a member of the LLC. The court also found that Bosen’s subjective intent to sign on behalf of the LLC and not as an individual did not raise a genuine issue of material fact because he never verbalized his intent not to be personally obligated under the contract. The court agreed with the district court that any ambiguity created by the manner in which Bosen filled out the form sales agreement should be construed against him on the basis that a contract is construed against the party preparing it or employing the words in doubt. In a lengthy dissent, the dissenting justice complained that one of the lessons that can be drawn from the majority’s decision is that “a seller of goods need no longer obtain a personal guarantee or pierce the protective veil of a limited liability entity in order to hold a representative of the entity personally liable. The seller needs only to get the representative to sign a confusing, one-size-fits-all contract, doing away with the bother of asking for a personal guarantee or the tedious business of proving the entity’s shield of liability should be disregarded.”

Champluvier v. State

942 So.2d 145, No. 2003-CT-02581-SCT (Miss. 2006)

The Mississippi Supreme Court reversed the court of appeals and held that a criminal statute punishing embezzlement by certain persons from an “incorporated company” or “private person” does not apply to similar acts against a limited liability company. The court pointed out that an LLC is by definition an unincorporated association and the LLC statute specifically prohibits an LLC from using the words “corporation” or “incorporated” in its name. The court noted that the Legislature amended the embezzlement statute as recently as 2003, at which time it was presented with a golden opportunity, if it chose to do so, to further revise the statute to include the “‘more modern business entities.’” The defendant’s conviction for stealing from an LLC was thus reversed.

All Star Land Title Agency, Inc. v. Surewin Investment, Inc.

No. 87569, 2006 WL 3095701 (Ohio App. Nov. 2, 2006)

Two corporations, All Star and Surewin, formed an Ohio LLC to operate a title agency. The operating agreement permitted the members to compete with each other and the LLC, and the operating agreement stated that no member was required to perform services for the LLC. After Surewin’s owner formed a title agency with another person and requested winding up of the LLC, All Star sued Surewin alleging breach of contract and breach of fiduciary duty. All Star argued that Surewin breached the terms of the operating agreement by withdrawing from the LLC, but the court rejected this argument because the operating agreement provided that the LLC was dissolved upon the unanimous written agreement of the members, and both members agreed in email correspondence to dissolve the LLC. All Star argued that Surewin breached an oral agreement that it would refer customers of its real estate business to the LLC, but the court found that the oral agreement was unenforceable based on the statute of frauds. The court stated that the agreement could not be performed within one year because the LLC’s term was thirty years. The court rejected All Star’s argument that the doctrine of part performance removed the agreement from the statute of frauds, citing the Ohio Supreme Court’s holding that the doctrine of part performance applies in the sale or leasing of real estate, not to contracts of personal services. The court stated that the fiduciary relationship involved in an LLC would ordinarily prevent direct competition between members of the LLC, but the court concluded that there was no duty not to compete in this case because the operating agreement specifically allowed competition. The court also rejected tortious interference and promissory estoppel claims of Surewin.

Matthews v. D’Amore

No. 05AP-1318, 2006 WL 3095817 (Ohio App. Nov. 2, 2006)

In this dispute over the membership of an Ohio LLC, the court concluded that the members were determined by the operating agreement rather than the articles of organization and appointment of statutory agent. McDonald and Crow met on many occasions and agreed to form an LLC to develop real property owned by Crow. Crow prepared articles of organization and an appointment of statutory agent using preprinted forms of the Secretary of State. Three other individuals (the defendants) signed and filed these documents. The appointment of agent appointed Crow as agent and stated that the defendants as the “undersigned,” were “at least a majority of the members” of the LLC. The pre-printed word “member” appeared beneath the signatures of each of the defendants, and the pre-printed instructions stated that “[a]n original appointment of agent form must be signed by at least a majority of the members of the limited liability company.” McDonald and Crow signed an operating agreement as members, and a separate agreement that was incorporated by reference in the operating agreement detailed the duties and responsibilities of Crow and McDonald as members and set forth how the profits would be distributed to Crow and McDonald. These agreements did not list the defendants as members and were not signed by the defendants. Several years after the LLC was formed, Crow transferred his interest in the LLC to a trust. Crow died a few months later. After Crow died, the defendants’ attorney filed a statutory agent update naming the defendants’ attorney as the new statutory agent of the LLC. The defendants’ attorney also wrote the LLC’s attorney asserting that the defendants were the only members of the LLC. McDonald claimed that the defendants’ only role was to procure tenants (for the property contributed by Crow to the LLC) in exchange for a commission. The court of appeals upheld the trial court’s summary judgment in favor of McDonald and the trustee of Crow’s trust on the issue of the membership of the LLC. The court relied upon the statutory definition of a “member” as “a person whose name appears on the records of the limited liability company as the owner of a membership interest in the company” and “membership interest” as “a member’s share of the profits and losses of a limited liability company and the right to receive distributions from that company.” The court pointed out that the only persons whose names appeared in the LLC’s records as sharing in the LLC’s profits and losses and having a right to receive distributions were Crow and McDonald. The defendants argued that the articles of organization and appointment of agent were LLC records that at least established a genuine issue of material fact regarding the identity of the members, but the court pointed out that these documents did not state that the defendants had a right to share in the LLC’s profits or losses or receive distributions. Furthermore, the court pointed out that the statute does not require that the persons forming an LLC be members, but merely requires the person who signs and files the articles of organization to be an “authorized representative” of the LLC. The court also noted that the forms used to form the LLC were out of date and that the appointment of agent was not required to be signed by a majority of the members at the time the LLC was formed. In addition, the court found unreasonable the defendants’ contention that neither McDonald, who contributed $25,000 cash, nor Crow, who contributed a $7 million piece of real estate, would be considered members of the LLC. The court also relied upon and discussed two previous opinions in which it had looked to the operating agreement rather than the articles of organization to determine the membership in an LLC and the rights, responsibilities, and liabilities of members.

Decker v. Decker

No. 2004AP3112, 2006 WL 3408316 (Wis. App. Nov. 28, 2006)

The court of appeals withdrew an earlier opinion in this matter and issued this opinion in which it interpreted the buy-sell and dissolution provisions of an LLC operating agreement and sought to clarify the trial court’s order in the case. Two brothers who operated an investment real estate business through a number of LLCs had reorganized the business by entering an operating agreement and forming a new LLC. Pursuant to the operating agreement, one of the brothers, David, sent a letter to the other brother, Frederick, declaring that a deadlock existed. Frederick did not believe that a deadlock existed and requested that David rescind the letter, but David refused. Frederick then made an offer under the operating agreement to buy David’s interest in the business for $7,000,000, approximately two to three times what the interest was worth. David accepted the offer, but Frederick never closed on the purchase. David brought an action asserting, among other claims, a claim for damages for breach of contract based on Frederick’s failure to buy his interest. The court found that Frederick’s offer and David’s acceptance did not amount to an enforceable contract because the operating agreement provided for the consequences of a failure to close. Upon Frederick’s failure to close, David had an opportunity to purchase Frederick’s interest for the same amount, and if David did not do so, the operating agreement provided for dissolution of the LLC. The court found that Frederick “sabotaged” the buy-out provisions of the operating agreement by making an outrageous offer of $7,000,000 with no intention of closing on the purchase and knowing David would not be inclined to pay that amount, leaving dissolution as the specified remedy under the operating agreement when a purchase and sale of one of their interests did not occur. Frederick argued that the LLC’s properties must then be sold on the open market and that the court-appointed receiver was not authorized to accept an offer by David. The court, however, concluded that the receiver was authorized to accept David’s offer because it was no different from any third party offer except that it was for “all the property interests held by Frederick and it eliminated costly real estate commissions and other miscellaneous costs.” The trial court’s order stated that the receiver was authorized to assign to David all interests in the LLC not already owned by David, but the court of appeals stated that only a sale of assets would be consistent with the dissolution procedure specified in the operating agreement. Therefore, the court of appeals ordered that the trial court’s order be corrected to refer to a sale of the LLC’s assets. The court stated that a sale of assets would presumably have negative tax consequences for David but the operating agreement permitted no other result. The court said that a sale of LLC interests could only occur under the operating agreement when the LLC was to continue to exist as a viable company. Under the circumstances, the operating agreement mandated dissolution and a sale of the assets. Furthermore, the court concluded that the trial court had statutory authority to order the sale to David under the judicial dissolution provisions of the Wisconsin LLC statute. These provisions authorize a court decree of dissolution when a controlling member engages in “oppressive” conduct, and the court found Frederick’s “obstructionist” tactics showed a lack of good faith and constituted oppression.

Pfeifer v. Legault & Son Construction

No. CV054002595, 2006 WL 3290545 (Conn. Super. Oct. 26, 2006)

Insufficiency of evidence to pierce LLC veil.

Thompson v. Colonial Court Apartments, LLC

C.A. No. 05C-09-126-RRC, 2006 WL 3174767 (Del. Super. Nov. 1, 2006)

Failure of LLC to terminate authority of registered agent when winding up.

In re LaVelle

350 B.R. 505 (D. Idaho 2005)

Unavailability of homestead exemption with respect to property owned by LLC.

In re Fortune Natural Resources Corporation

350 B.R. 693, 47 Bankr.Ct.Dec. 53, No. 04 14112 (E.D. Bankr. 2006)

Analysis of LLC as non-statutory insider of debtor corporation.

Rapazo v. Talamo

No. 062779BLS1, 2006 WL 3292632 (Mass. Super. Oct. 10, 2006)

Judicial dissolution based on deadlock.

Nola Realty LLC v. DM & M Holdings L.L.C.

33 A.D.3d 523, 823 N.Y.S.2d 137, 2006 N.Y. Slip Op. 07768 (N.Y. A.D. 1 Dept. 2006)

Personal liability of members for down payment under LLC contract to purchase real estate based on NSF personal checks.

Pepler v. Coyne

33 A.D.3d 434, 822 N.Y.S.2d 516 (N.Y. A.D. 1 Dept. 2006)

Personal liability of LLC co-founder and managing member under state employment discrimination law based on status as “employer”.

In re CEP Holdings, LLC

Nos. 06-51847, 06-51848, 01-51849, 2006 WL 3422665 (Bankr. N.D. Ohio Nov. 28, 2006)

Applicability of Section 101(31) definition of insider, which relates to corporations and does not refer to LLCs, to determine insider status for LLCs.

Silver Knight Sales & Marketing, Ltd. v. Globex International, Inc.

No. 2:06-cv-123, 2006 WL 3230770 (S.D. Ohio Nov. 6, 2006)

Distinction between veil piercing of LLC for purposes of exercise of personal jurisdiction and imposition of personal liability.

Wakefield v. Seattle Chocolate Company, LLC

No. 56146-4-I, 2006 WL 3404796 (Wash. App. Nov. 27, 2006)

Interpretation of operating agreement regarding issuance of units to retire debt of LLC.