January 2011 — Issue 58

January 2011 - March 2011

LLC Cases: Affco Investments 2001, L.L.C. v. Proskauer Rose, L.L.P.

625 F.3d 185 (5th Cir. 2010).

The plaintiffs invested in a complex tax avoidance scheme that was later disallowed by the IRS. The plaintiffs sued a number of defendants, including the law firm of Proskauer Rose, L.L.P. (“Proskauer”), asserting claims under RICO and the Securities Exchange Act of 1934. The tax avoidance scheme involved investments in LLCs, and the district court dismissed the RICO claim on the basis of the Private Securities Litigation Reform Act, which bars civil RICO claims based on predicate acts of securities fraud. The plaintiffs argued that the investments in the LLCs were not securities, but the court of appeals concluded that the ownership interests were investment contracts and thus securities under the federal securities laws. The court began by setting forth the three elements of the Howey test and noting that the only issue raised on appeal was whether the profits, i.e., the tax benefits, were to come solely from the efforts of others. The court discussed cases in which it has held that an investor’s theoretical power to make management decisions did not automatically preclude a finding the investor relied solely on the efforts of others. The court stated that the control of the LLC investors in this case was more theoretical than actual. The plaintiffs did not plead that they exercised any managerial authority over the LLCs. The complaint portrayed the plaintiffs as passive investors who depended–both in reality and according to their investment contracts–upon the efforts of investment consulting and brokerage entities for their profits. Thus, the investments were securities, and the district court did not err in dismissing the RICO claim as barred by the Private Securities Litigation Reform Act based on the face of the pleadings. The court also analyzed the sufficiency of the pleadings with regard to the plaintiffs’ securities fraud claim against Proskauer under Section 10(b) of the Exchange Act and Rule 10b-5. Specifically, the court examined whether the plaintiffs had adequately pled the required element of reliance. The court looked to the Supreme Court’s decision in Stoneridge regarding scheme liability in the absence of Supreme Court authority directly addressing whether a secondary actor can be held liable in a private Section 10(b) action for deceptive conduct not attributed to it before the investor decides to invest. The court acknowledged that the causal chain between Proskauer’s conduct and the plaintiff’s injury was shorter than in Stoneridge, but the court stated that the plaintiffs bore a heavy burden in showing that they in fact relied upon Proskauer’s own deceptive conduct. The court said that Stoneridge appears to imply that a secondary actor’s conduct or statement must be known to the investor in order for the investor to rely on it, and the court thus concluded that explicit attribution is required to show reliance under Section 10(b). Applying this standard, the court concluded that the district court properly dismissed the securities fraud claims against Proskauer. Although the plaintiffs’ pleadings clearly described the intimate involvement of Proskauer in the tax scheme, the plaintiffs did not explicitly assert that they had knowledge of Proskauer’s role prior to the actual investment. Thus, the plaintiffs failed to show reliance.

Simmons v. Ball

68 So.3d 831 (Ala. 2011)

Brothers Andy and Mike Ball formed an LLC to flip houses. The articles of organization placed the business and affairs “under the managerial control of the member: Andy Ball.” Other provisions of the articles of organization assumed that Andy was the manager and further referred to his authority as a member but did not explicitly identify Andy as a manager. The operating agreement named Andy as the manager, registered agent, and organizer of the LLC. After a disagreement between Andy and Mike, Andy “disappeared” for several weeks, and Mike, acting on advice of his lawyers, attempted to preserve the LLC’s assets by transferring the LLC’s property into his name. Mike executed and recorded deeds purporting to transfer to himself the real property owned by the LLC. Mike filed a suit to dissolve the LLC, and the court ordered that the LLC’s assets be placed back in the LLC name and transferred only by court order, with the proceeds to be held in escrow pending instructions by the court. Mike and Andy agreed that deeds conveying back to the LLC the property Mike had attempted to transfer to himself would be signed but not recorded until third-party purchasers were located and court approval for the sale was obtained. A copy of one of the deeds signed by Mike to the LLC was given to Andy’s lawyer, and Andy recorded the copy. Simmons then loaned the LLC money and received from Andy a mortgage on the property covered by the copy of the deed that was recorded. When the LLC defaulted on the loan, Simmons sought to foreclose on the mortgaged property, and Mike sought to enjoin the foreclosure. The trial court concluded that the conspicuous designation “COPY” on the deed recorded by Andy was sufficient to put Simmons on inquiry notice as to why the original deed was not recorded. The dispositive issue addressed by the court in this opinion was the effectiveness of the deed Mike executed transferring the property from the LLC to Mike after Andy became inactive in the LLC. The court relied upon the clear language of the statute that no member is an agent of the LLC when a manager has been appointed by the articles of organization. The statute further specifically provides that a member, acting as a member, has no authority to transfer property of the LLC if the articles of organization provide that management of the LLC is vested in a manager or managers. Because the LLC’s articles of organization appointed Andy as manager and Mike was only a member, Mike had no authority to transfer the LLC’s property to himself. The court analyzed whether the deed from the LLC to Mike was voidable at the LLC’s option or simply void, having no legal effect on the title to the property at issue. The court stated that the statutory provisions indicate an intent to protect third parties as well as the LLC, and the court concluded that a transaction by a member in contravention of the authority vested in a manager by the LLC’s articles of organization is void. Thus, Mike’s transfer of title of the LLC’s property to himself was void, and Simmons received title to the property at issue by the mortgage from the LLC executed by Andy regardless of whether Simmons had notice of previous transactions regarding the property.

Sanders v. Ohmite Holding, LLC

17 A.3d 1186 (Del. Ch. 2011)

The plaintiff, Sanders, sought books and records from a Delaware LLC pursuant to Section 18-305 of the Delaware Limited Liability Company Act. When the LLC was formed in 1998 in connection with a merger, Sanders lent $2 million to one of the members and received a security interest in the member’s units. The loan was partially repaid in 2000, and Sanders released his lien on half of the units held as collateral. In 2007, the member transferred his remaining units to Sanders, who believed and was told by the member that the units constituted 7.75% of the LLC. In 2008, Sanders learned that his interest was not the 7.75% stake that he believed he had, but rather a mere 0.000775%. Initially, the LLC refused to acknowledge that Sanders had become a member of the LLC. After initiating an action to obtain a declaratory judgment that he was a member of the LLC, the LLC conceded that Sanders was the owner of 7.75 units. In 2008, Sanders received a K-1 showing that he owned only a 0.000775 stake in the LLC. Sanders sought an explanation and received only a terse response from the LLC reporting that additional units had been issued to obtain additional capital before the transfer of the units to Sanders. Sanders sent the LLC a letter requesting books and records relating to the dilution of the interest he purchased. The letter requested books and records in several categories and stated that he sought the records to evaluate the value of his ownership interest, the status of the LLC’s business and financial condition, the performance of the LLC’s management, and the legitimacy of the dilution of his interest from 7.75% to 0.000775% of the LLC. The LLC denied the request on the basis that Sanders did not set forth any facts indicating why he needed to evaluate the matters specified and could not make any assertion that the dilution was illegitimate since he was not a member at the time of the transaction that caused the dilution. After Sanders filed this action, the LLC provided copies of tax returns and unaudited financial statements for the years 2007-2009. From these documents, Sanders could reasonably infer that the LLC issued units in a related-party transaction at a deep discount. Sanders thus questioned whether the LLC received proper consideration for the additional units issued and whether the LLC was being operated exclusively for the benefit of its principal owner rather than the members as a whole. Sanders requested books and records to answer those questions, and the LLC refused the request. The LLC agreement provided that a non-member assignee was not entitled to receive any information of LLC transactions or inspect the LLC’s books. The LLC claimed that Sanders was not entitled to obtain any books and records from before the date in 2007 when he became a member. The court stated that the provision in the LLC agreement only limited the rights of an assignee. Sanders was not an assignee, but a member, and the LLC agreement did not limit the statutory inspection rights of a member under the Delaware LLC statute. Looking to corporate law addressing the proper purpose requirement, the court concluded that Sanders had a proper purpose for his inspection request. The court rejected the LLC’s argument that Sanders could not have a proper purpose for inspecting the books and records because he was not yet a member at the time of the events he sought to investigate. If the events he sought to investigate were “reasonably related” to his interest as a member, then he should be given access. Valuing his ownership and investigating potential wrongdoing are proper purposes. At this stage, Sanders only needed to have a credible basis to suspect wrongdoing, a standard the court said was readily met here. The court also concluded that the books and records sought were reasonably required to fulfill the stated proper purpose. Minutes of membership or management meetings relating to dilution, documents reflecting the number of units issued and consideration for the units, filings on Schedule K-1, and books and records about the opportunity of Sanders or his predecessor to buy units at the same price were all necessary to evaluate whether the dilution was wrongful. Financial reports and tax returns going back to 2003 were necessary to evaluate whether there were extenuating circumstances that required issuance of a large number of units for a deep discount. The court thus granted summary judgment in favor of Sanders.

William Penn Partnership v. Saliba

13 A.3d 749 (Del. 2011)

Two minority members of a Delaware LLC sued the Lingo brothers for breach of their fiduciary duties in orchestrating the sale of the LLC’s sole asset, a motel, in a manipulative and deceptive sales process to a subchapter S corporation of which the Lingos were shareholders and directors. The Lingos were the managers of the LLC and owned 50% of the LLC through a partnership. The sale of the motel to the corporation for a purchase price of $6.6 million was advantageous to the Lingos because the corporation purchased the motel as an exchange property, and the corporation received a $1.6 million tax refund pursuant to Section 1031 (of which the Lingos’ share was approximately $434,000). The Lingos orchestrated the two-thirds vote of the members required by the operating agreement to sell the LLC’s motel by securing the approval of the remaining one-sixth member, who had some years earlier expressed interest in pursuing a sale of the LLC’s motel or selling his interest in the LLC. The chancery court found that the Lingos breached their duty of loyalty to the plaintiffs, and the chancery court awarded the plaintiffs their attorney’s fees because of the Lingos’ faithless prelitigation conduct. The Delaware Supreme Court affirmed the chancery court’s judgment. The supreme court noted that the parties agreed that managers of a Delaware LLC owe traditional fiduciary duties of loyalty and care to the members of an LLC absent provisions in the operating agreement expressly modifying or eliminating the duties. The Lingos were named as managers in the operating agreement of the LLC, and the agreement did not purport to modify or eliminate fiduciary duties; therefore, the parties agreed that the Lingos owed fiduciary duties of loyalty and care to the members of the LLC. As fiduciaries on both sides of a transaction, the Lingos bore the burden of establishing the entire fairness of the transaction. The court discussed and applied the two-prong test of entire fairness, i.e., fair dealing and fair price, and concluded that the chancery court did not err in finding that the transaction did not satisfy the standard. The court reviewed the conduct of the Lingos and identified multiple misrepresentations and material omissions that precluded the possibility that the property would be sold pursuant to an open and fair process. Several appraisals of the property, including the appraisal performed by the appraiser appointed by the chancery court, valued the property at under $6 million, but the court pointed out that the transaction must be evaluated as a whole. Merely showing that the sales price was in the range of fairness does not necessarily satisfy the entire fairness burden. The court concluded that the Lingos’ self interest in the transaction and their domination of the sales process (by withholding full information, providing misleading information, and imposing an artificial deadline) tainted the entire transaction. Inasmuch as the plaintiffs were left without a typical damage award (because the chancery court’s appraisal came in at a lower value than the sale price), the court found the chancery court’s decision to award attorney’s fees and costs to the plaintiffs to be well within its discretion and supported by Delaware law in order to discourage acts of disloyalty by fiduciaries. The court stated that, despite the general application of the American Rule that each party bears its own attorney’s fees, potentially harsher rules come into play where there has been a breach of the duty of loyalty. Absent the award of attorney’s fees in this case, the plaintiffs would have been penalized for bringing a successful claim against the Lingos for breach of their duty of loyalty, and the court of chancery court’s decision was thus supported by the policy of Delaware law of discouraging disloyalty.

CNL-AB LLC v. Eastern Property Fund I SPE (MS REF) LLC

C.A. No. 6137-VCP, 2011 WL 353529 (Del. Ch. Jan.28, 2011)

A preferred unitholder in an LLC that was the indirect owner of several resort properties sought to preliminarily enjoin foreclosure of the properties on the basis that the managing member of the LLC breached its fiduciary duties by entering into an agreement with the mezzanine lender that allowed the lender to foreclose on the properties in exchange for releases from gaurantees of the loans and other consideration. The court denied the injunctive relief based on the doctrine of laches and additionally found that the unitholder had failed to demonstrate a probably of success on the merits of the breach of fiduciary duty claim. The LLC operating agreement provided that the execution, delivery, or performance of any agreement authorized or permitted by the agreement shall be in the absolute an sole discretion of the managing member without consideration of any other obligation or duty, fiduciary or otherwise, of the LLC or the members, and that the execution, delivery, or performance of such an agreement would not constitute a breach of any duty the managing member might have owed to the LLC or any other person under the agreement or any duty stated or implied by law or equity. The operating agreement also relieved the managing member from liability for losses, liabilities, or benefits not derived as a result of any action or omission unless the managing member acted in bad faith and the act or omission was material to the matter giving rise to the loss, liability, or benefit not derived. Thus, the unitholder had the burden to show that the managing member acted in bad faith in facilitating and not opposing the agreements in issue and that its action was material to the unitholder’s loss. The court noted that the unitholder was bound as a member by the standards set forth in the operating agreement, and the court further observed that the unitholder’s argument that it was owed other duties by the managing member as a creditor (based on the fact that the unitholder had not been paid certain distribution amounts triggered by events specified in the operating agreement) was problematic based on the language of the Delaware LLC statute as interpreted in CML V, LLC v. Bax, in which Vice Chancellor Laster held that creditors of an LLC do not even have standing to bring a derivative suit against managing members for breaches of fiduciary duties. The court concluded that the unitholder did not show bad faith on the part of the managing member as required by the operating agreement. Further, the court concluded that the unitholder would not be able to prove that the managing member’s actions were material to the unitholder’s loss since the lender would have had the ability to foreclose on the properties without the agreement of the managing member. Finally, the court also found some merit in another argument made to defeat the breach of fiduciary duty claim, i.e., that no breach of fiduciary duty could be found because the managing member could not cause the unitholder to lose any asset of value. The unitholder’s equity interest was junior to all of the debt, and the investment was “hopelessly underwater.” Regardless of the agreements of which the unitholder complained, foreclosure on the property by some creditor appeared inevitable.

Farm & Ranch Services, Ltd. v. LT Farm & Ranch, LLC

779 F.Supp.2d 949 (S.D. Iowa 2011)

In 1998, Lee and Tripp formed an LLC of which Lee was initially designated by the operating agreement as sole manager with broad powers. The LLC acquired farm land enrolled in the Conservation Reserve Program (CRP) of the Commodity Credit Corporation. In 2000, the operating agreement was amended to make Lee and Tripp co-managers. At issue in this case were contracts entered into by Lee on behalf of the LLC relating to CRP payments. The court discussed agency principles as they applied to an Iowa LLC under the Iowa LLC statute in effect before the adoption of the Revised Uniform Limited Liability Company Act since the dispute predated adoption of the revised law. The court discussed the concepts of actual and apparent authority and stated that it was undisputed that Lee was an agent of the LLC as a manager, first as the LLC’s sole manager and thereafter as a co-manager. As such, he had actual authority as conferred in the operating agreement. In addition, Lee had apparent authority. The court stated that the LLC, by the operating agreement, knowingly permitted Lee to act as the manager and held out Lee as possessing the ordinary authority of a farm manager. The court also noted that the LLC statute provides that the act of any manager with agency authority for apparently carrying on in the ordinary course of the business or affairs of the LLC binds the LLC unless the manager lacks authority and the party dealing with the manager has knowledge of the lack of authority. The court characterized the statutory provisions as consistent with general principles of apparent authority in agency law. Thus, the court stated that a manager has apparent authority to act for the LLC in matters in the ordinary course of business unless the third person has actual knowledge that the manager does not have authority to act. The court stated that a third party does not have to verify the manager’s authority as to matters in the ordinary course and is not charged with knowledge of limitations in organizational documents. “Were it otherwise, third parties would be reluctant to deal with an LLC,” according to the court. Although the Revised Uniform Limited Liability Company Act recently enacted in Iowa did not apply to this case, the court stated that “[t]his principle of a manager’s apparent authority appears to have been carried forward in the Revised Uniform Limited Liability Company Act now largely in effect in Iowa.” The court noted the Act’s comments, which state that courts may view the position of an LLC manager as clothing the person with apparent authority to take actions that reasonably appear within the ordinary course of the LLC’s business and which state that the nature of an LLC’s business is relevant to whether a third party could reasonably believe that a manager is authorized in the transaction. While sole manager, Lee had authority to take action to re-enroll the LLC’s farms in the CRP. The question was Lee’s authority later when he was co-manager to sell a substantial part of the CRP entitlement. Iowa law at the time provided that manager decisions required a majority vote of the managers. Tripp was not consulted by Lee, and the third party did not know Lee lacked authority. The court concluded that the third party could reasonably believe that Lee as manager of the LLC had authority to sell the CRP payments and that the transaction was not so extraordinary as to call his apparent authority into question. The court also discussed the principle of ratification and concluded that the LLC had ratified the contracts at issue by accepting the benefits (though Lee would later misappropriate for himself the payments received in the transaction) and failing to object for three years. The court stated that the benefits were “knowingly” accepted by virtue of the knowledge of Lee, whose knowledge as an agent is imputed to the principal. Even though Lee was acting adversely to the LLC by scheming to defraud the LLC and Tripp, the court concluded his knowledge was imputed because it was necessary to protect the rights of the third party who acted in good faith. Further, the court found it entirely appropriate that the LLC and Tripp should bear the consequences of Lee’s conduct where Tripp abdicated the management of the LLC to Lee and failed to take even the most basic precautions to ensure that it was being appropriately managed. The court characterized Tripp’s inattention as breaching his own fiduciary responsibility and as contributing to Lee’s malfeasance.

Bluewater Logistics, LLC v. Williford

55 So. 3d 148 (Miss. 2011)

Four individuals formed two member-managed LLCs of which they were equal members. The LLC agreement contained a provision permitting the LLC to redeem any member’s interest upon a vote of 75% of the members. Three of the members ousted the fourth member, Williford, locking him out and notifying him that his status as a “partner” was “terminated” and that he would be paid one-fourth of the fair market value of the LLCs. Williford filed a complaint against the other members and the LLCs in which he sought damages and injunctive relief preventing his ouster. Temporary injunctive relief was granted. Prior to trial, the LLC and the remaining members sought to dissolve the temporary injunction on the basis that the defendants had rescinded their offer to buy Williford’s interest (although they reaffirmed his “firing”) and that the relief sought by Williford was based on his desire to remain a member. The matter proceeded to trial, at which the defendants’ attorney argued that the only relief Williford requested was to remain a member so that there was no issue ripe for trial. The defendants argued that they were authorized to change their minds and allow Williford to remain a member and at the same time “fire” him and exclude him from the business. The chancery court found that Williford’s complaint was sufficient to put the defendants on notice that he was seeking damages, and the court awarded Williford the value of his interests in the LLCs. The defendants appealed, and the court of appeals concluded that the defendants’ motion to dissolve the injunction had rescinded Williford’s ouster and that the chancery court erred in awarding Williford damages. The Mississippi Supreme Court disagreed. As an initial matter, the supreme court found that the complaint sufficiently alleged a claim for breach of contract and compensatory damages. The court rejected the defendants’ argument that the chancery court had no authority to award Williford the value of his interests in the LLCs, pointing out that the Mississippi Limited Liability Company Act specifically allows a chancery court to enforce an LLC agreement “by injunction or by such other relief that the court in its discretion determines to be fair and appropriate in the circumstances.” This language provided the chancery court authority to award Williford the value of his interests in the LLCs. The defendant members argued that the chancery court had no authority to grant Williford judgments against them as individuals, but the court pointed out that the operating agreements included provisions that “[n]o member shall be liable, responsible or accountable in damages or otherwise to any other Member or to the Company for any act or omission performed or omitted by him except for acts of gross negligence or intentional wrongdoing.” The court concluded that this provision established the chancery court’s authority to hold the individual defendants liable for acts of gross negligence or intentional wrongdoing. The supreme court agreed with the chancery court’s application of closely held corporation law that requires a controlling shareholder’s action to be intrinsically fair to the minority, saying the rule applies with equal force to LLCs. Accordingly, the LLC members in this case had a duty to one another and the LLCs, and the defendant members breached that duty by improperly squeezing out Williford. The supreme court concluded that the record supported the chancery court’s findings that the defendants breached the LLC operating agreements in a willful, grossly negligent manner. The defendants ousted Williford without grounds required by the operating agreements and attempted to reverse their position only after Williford sued. The court rejected the defendants’ argument that they could “fire” Williford and exclude him from the business while rescinding their offer to purchase and retaining him as a member. The court acknowledged that this argument might apply to other types of entities but stated it had no application to member-managed LLCs. The court pointed out that every member of a member-managed Mississippi LLC is an agent of the LLC and that the operating agreements vested management of the LLC in the members. Thus, under the statute, Williford could not be “fired,” and the defendants could only remove him from management by amending the operating agreement, which required consent of all members. The court also rejected the defendants’ argument that they had rescinded their “offer” to purchase. Relying on the terms of the redemption provisions of the operating agreements, the court stated that the LLCs were not merely making an offer, but invoking their right to purchase Williford’s interests under the agreements. The operating agreements contained no provision for a unilateral rescission of the action. The defendants could have chosen under the agreements to make the exercise of their right to purchase effective immediately or at a future date, and the court said that, having chosen the former, the defendants had every right to exclude Williford but also had a companion duty to tender payment. Had the defendants chosen the latter, there would be no right to exclude Williford until they tendered payment. The court characterized the defendants’ actions–locking Williford out and excluding him from the business and then later claiming they had not really decided for certain to purchase his interest–as the best of both options for the defendants and the worst for Williford. The court could not conclude that the chancery court was in error in finding this action to be a willful, grossly negligent breach of contract. The only error the supreme court found on the part of the chancery court was the chancery court’s conclusion that it did not have authority to award Williford attorney’s fees and its use of a “statutory rate” of post-judgment interest that is no longer specified in the statute. The supreme court acknowledged that attorney’s fees generally are not available in breach of contract cases under Mississippi law, but the court stated that there are exceptions where the contract provides for attorney’s fees or in the case of “outrageous” conduct that would support an award of punitive damages. The court thus remanded to the chancery court for consideration of whether an award of attorney’s fees was factually warranted.

Synectic Ventures I, LLC v. EVI Corporation

251 P.3d 216 (Or. App. 2011)

Three LLC venture capital funds that made a loan to the defendant argued that the manager of the LLCs lacked authority to bind the LLCs to an amendment to the loan agreement extending the time of payment. The manager of the LLCs also served as board chairman, treasurer, and fundraiser for the borrower. The LLCs argued that the manager lacked authority to amend the loan agreement based on limitations in letter agreements entered into by the manager with certain investors or, alternatively, because the manager breached duties to the LLC by executing the amendment. The court reviewed provisions of the Oregon LLC statute regarding a manager’s authority, provisions of the LLC operating agreements, provisions of the letter agreements, and common-law agency principles and concluded that the manager had actual authority to bind the LLCs to the amendment to the loan agreement. The Oregon statute provides that a manager is an agent of the LLC for the purpose of its business and that an act of the manager for apparently carrying on in the ordinary course the business of the LLC binds the LLC unless the manager lacks authority and the third party knew or had notice that the manager lacked authority. The operating agreements conferred the authority to manage and control the LLC exclusively on the manager and granted any third party the right to rely on the manager’s authority without further inquiry. The LLCs argued that the manager lacked authority to amend the loan agreement because concerned investors who had investigated the manager’s management of the funds had secured the agreement of the manager in certain letter agreements that the manager would not incur new obligations on behalf of the funds or increase any current obligations without the approval of the concerned investors. The court concluded that the letter agreements did not limit the manager’s authority to bind the LLCs to the amendment because the agreements were with a group of individual investors in the LLCs rather than the LLCs themselves. Further, the court pointed out provisions of the letter agreements and email correspondence indicating that the letter agreements did not limit the authority of the manager to act on behalf of the LLCs. The operating agreements contained a specified procedure for removal of the manager that was eventually followed, but not before the amendment was executed, and the letter agreements were ineffective to limit the manager’s authority because they did not comply with the process for removal of the manager. The court acknowledged that the letter agreements may have created obligations of the manager to the concerned investors, but any breach of those obligations was between them and did not affect his authority to conduct business on the LLCs’ behalf. The LLCs also argued that they were not bound by the amendment to the loan agreement because the manager breached his statutory and contractual duties of loyalty, care, and good faith. The court analyzed Oregon case law relied upon by the LLCs for the proposition that an agent cannot bind his principal in a matter in which his own interest conflicts with his duty to the principal, particularly when the third party knew that the agent was breaching his duties. The court concluded that the breach of fiduciary duty in the cases relied upon by the LLCs did not act to sever or limit the agent’s authority in those cases; the cases stood only for the “unremarkable proposition that, if a third party is aware that the agent is engaged in self-dealing in the transaction, the third party must inquire into the agent’s actual authority.” Since the court determined that the manager retained the express authority under the operating agreement to enter into the amendment, any inquiry based on knowledge by the borrower of the manager’s self-dealing (which the LLCs argued was imputed to the borrower since the manager was an officer of the borrower) could only lead to the conclusion that the manager was authorized. The LLCs raised related, but distinct conflict-of-interest issues, based on the provisions of the LLC statute requiring majority member approval of a conflict-of-interest transaction. The court pointed out that the statutory requirement applies unless the operating agreement provides otherwise, and the operating agreement of the LLCs contained a provision permitting any member or its affiliates to engage in other businesses and investments without any duty to account and to own securities issued by or participate in the management of companies in which the LLCs may invest. These provisions further stated that the other members and LLCs would have no claim or cause of action arising from such ownership or participation. The court concluded that the type of conflict alleged was authorized and that the statutory approval provision did not apply.

Deliverance Poker, LLC v. Tiltware, LLC

771 F.Supp.2d 658 (W.D. Tex. 2011)

The court concluded that the citizenship of an individual who owned a 1.75% membership interest but was not a member (it is not clear from the opinion whether the individual was an assignee or a person who received a membership interest directly from the company but was not admitted as a member) must be included when determining the LLC’s citizenship for diversity jurisdiction purposes. The court noted that the Fifth Circuit Court of Appeals has held, based on C. T. Carden v. Arkoma Assocs., that an LLC’s citizenship is comprised of the citizenship of all its members, but that there is a dearth of authority as to whether the citizenship of individuals who are not members yet still own a membership interest should be included in determining the citizenship of an LLC. Relying on Carden and other United States Supreme Court decisions in which the Supreme Court has refused to examine the particulars of the position or control of members or partners of unincorporated associations for diversity jurisdiction purposes, the court concluded that an owner of an LLC is an obvious component part of the LLC and that the extent of the owner’s involvement in the LLC’s operations is not relevant. The court found that it made sense to consider the 1.75% owner to be one of the “several persons composing” the LLC because the Supreme Court has included such persons without regard to their level of control or involvement in the affairs of a company.

Lavi v. Wideawake Deathrow Entertainment

C.A. No. 5779-VCS, 2011 WL 284986 (Del. Ch. Jan. 18, 2011)

(procedural defectiveness of motion to dismiss LLC member’s action to compel inspection of LLC’s books and records)

Indiana Department of State Revenue v. Belterra Resort Indiana, LLC

935 N.E.2d 174 (Ind. 2010)

(application of step doctrine to impose use tax on transfer of riverboat from parent company to subsidiary LLC as capital contribution)

Baltimore Line Handling Co. v. Brophy

771 F.Supp.2d 531 (D. Md. 2011)

(limited liability of member; absence of fraud or paramount inequity required to pierce LLC veil given high standard required under Maryland law and reluctance of Maryland courts to pierce veil)

Headway Investment Partners II, L.P. v. A.M. Todd Group, Inc.

No. 1:09-cv-721, 2010 WL 3942821 (W.D. Mich. Oct. 6, 2010)

(interpretation of operating agreement of Delaware LLC regarding remedies for failure to fulfill capital contribution obligation; non-exclusivity of contractual liquidated damages provision for failure to make capital contribution under Delaware LLC statute)

Pitman Place Development, LLC v. Howard Investments, LLC

330 S.W.3d 519 (Mo. App. 2010)

(apparent authority of manager to bind LLC on promissory note and deed of trust)

Securities and Exchange Commission v. Ryan

771 F.Supp.2d 355 (N.D.N.Y. 2010)

(separate existence of LLC and sole member for purposes of LLC’s ability to assert or waive attorney-client privilege with respect to law firm’s representation of both member and LLC; ability of receiver of LLC to assert or waive LLC’s attorney-client privilege; absence of Fifth Amendment implications with respect to single-member LLC’s business records)