March 2008 — Issue 25

EuroCapital Advisors, LLC v. Colburn

C.A. No. 3035-VCN, 2008 WL 401352 (Del. Ch. Feb. 14, 2008).

The court exercised its discretion to stay this action in Delaware brought by a Delaware LLC and an individual who claimed to be its sole member (Dyne) against an individual (Colburn) who claimed to be a member in the LLC by virtue of an oral agreement with Dyne. In the Delaware action, the LLC and Dyne sought a declaratory judgment that Colburn was not a member in the LLC, or, alternatively, rescission of her membership based on misrepresentations by Colburn. In an action in federal court previously filed against Colburn in connection with another dispute, Colburn had asserted individual and derivative claims as a member of the LLC against Dyne and another individual (Markiles) to whom she claimed profits of the LLC had been diverted. Colburn’s claims in the federal action were dismissed on grounds of improper joinder, and she then filed an action in California state court asserting the same claims against the LLC, Dyne and Markiles. The court applied the Delaware rule that a party seeking a stay must show that there is “a prior action pending elsewhere, in a court capable of doing prompt and complete justice, involving the same parties and the same issues.” If these conditions are satisfied, a court has discretion, to be “freely exercised,” to stay the proceeding. The court found that the California action would be accorded first-filed status because, although the action in California state court was filed after the Delaware action, the claims had first been filed in the federal action and would be viewed as a continuation of the earlier-filed but dismissed federal court action. The court concluded that there was substantial identity between the parties and issues, the key question in both actions being whether Colburn is a member of the LLC. The court also found that the California courts were capable of providing prompt and complete justice in the matter. The court stated that Dyne and the LLC were unable to identify any important questions in an emerging area of Delaware law. Dyne and the LLC suggested that the identity of members in a Delaware LLC would constitute such an area, but the court found no apparent novel questions relating to membership in this case. Though the judicial inquiry might be factually complicated, the court stated that the legal issue was simply a matter of contract, i.e., to what did Colburn and Dyne agree. Dyne and the LLC also suggested that there were important questions of LLC governance, but the court stated that these questions were framed by the derivative aspects of Colburn’s complaint in California and were not squarely raised in the Delaware action. Thus, as a matter of discretion, the court stayed the Delaware action. The court noted that Dyne and the LLC had not raised, and had no basis to argue, that litigating in California would cause any hardship since Dyne and Colburn were both California residents and the events in question took place in California. The court noted that it did not need to reach the novel attempt of Dyne and the LLC to exercise personal jurisdiction over Colburn in Delaware under the provisions of the Delaware LLC statute that subject a member who participates materially in the management of the LLC to personal jurisdiction as a manager.

Citrin Holdings LLC v. Cullen

130 LLC, C.A. No. 2791-VCN, 2008 WL 241615 (Del. Ch. Jan. 17, 2008)

The court exercised its discretion to stay this action in Delaware brought by the majority member of several Delaware LLCs against the minority member. The court found that the conditions for exercise of the court’s discretion to stay the action were satisfied, i.e., the minority member had filed a previous action in Texas involving substantially the same issues and parties, and the Texas court was capable of doing prompt and complete justice. In the Delaware action, the majority member sought a declaratory judgment that its efforts to dissolve the LLCs were proper, that the minority member was not entitled to advancement of expenses incurred in pursuing the Texas action (although the minority member had not asserted such a right), and that the Delaware court would retain jurisdiction in any disputes arising out of the dissolutions. In the Texas action, the minority member sought an accounting of the LLCs and asserted claims of fraud and misrepresentation against the majority member. After the filing of the Delaware action, the minority member amended his complaint in the Texas action to allege breaches of fiduciary duty and majority oppression based on the majority member’s actions to dissolve the LLCs and the acquisition by the majority member or its affiliates of properties the LLCs had been investigating. The court found that the Texas action did not lose its status as “first-filed” despite a three-month delay in service of the complaint on the majority member because the majority member had knowledge of the lawsuit less than five days after its filing and possession of a copy of the complaint less than a month after its filing. Additionally, nothing other than docketing and service had occurred in the Texas action prior to service of the complaint. Next the court concluded that the issues and parties in the two actions were substantially the same. Although the precise issues framed initially in the Texas action bore little resemblance to the issues posed by the Delaware action, both complaints arose from the same core conduct. Finally, the court concluded that the Texas court was capable of doing prompt and complete justice. The court acknowledged that the majority member was correct in its assertion that Delaware law with respect to dissolution and winding up of LLCs has not been fully developed, but the court stated that the majority member identified no novel or important issue that should impel a Delaware court to refrain from yielding the field. Should the issue of the Texas court’s personal jurisdiction over the majority member be resolved against the minority member, the court stated that the question of the stay could be revisited, but a mere challenge to personal jurisdiction did not demonstrate that the Texas court was unable to address fully the disputes. The court pointed out that both parties had engaged in tactics designed to secure the preferred forum and neither could lay exclusive claim to the high ground. Having determined that the prerequisites for the exercise of discretion to stay the proceeding were satisfied, the court identified two especially important considerations in weighing whether to stay the Delaware action. First, although there might be a distinction drawn between pre-dissolution and dissolution/post-dissolution conduct, any global resolution would necessarily involve both periods of time, and one comprehensive proceeding would be more efficient. Second, the court viewed the Delaware complaint as only sparsely crystallizing a ripe dispute since it only sought a declaration of non-breach with respect to dissolution and a resolution of a right to advancement that had not been sought. The court thus concluded that there simply were no causes of action asserted in the Delaware action that called out for judicial determination in Delaware.

Sunflower Bank, N.A. v. Airport Red Coach Inn of Wichita, L.L.C.

No. 95,320, 2008 WL 360641 (Kan. App. Feb. 8, 2008)

An LLC operating agreement provided that the members could appoint a member as general manager of the LLC and that such person would have authority to execute instruments on behalf of the LLC. The operating agreement also required consent of all members for LLC borrowing. The members appointed a manager who signed certain promissory notes on behalf of the LLC, and the bank argued that the members must have intended for the manager to have some discretionary authority. The court held that the managing member was not authorized to execute the promissory notes because the members did not approve the loans. The court found that the term “execute” meant the power to sign loan documents on behalf of the LLC, but only once the authority to borrow had been granted by all members. The manager did not have implied authority because the LLC members had no idea he was borrowing the money. The bank could not rely on statutory provisions regarding the manager’s apparent authority because the bank had a copy of the operating agreement and thus had written notice of the limits on the manager’s authority.

In re McCormick

381 B.R. 594, No. 07-37064 (cgm) (Bankr. S.D. N.Y. Feb. 8, 2008)

The debtor, an individual, sought extension of the automatic stay in his Chapter 13 bankruptcy to his wholly owned LLC. The court first analyzed whether an LLC is eligible to be a debtor or co-debtor under Chapter 13. The court concluded that an LLC is not eligible to be a debtor under Chapter 13 because it is not an individual, and the court concluded the co-debtor stay is limited to individuals with consumer debt. The court next concluded that the provision of Chapter 13 authorizing self-employed debtors to continue to engage in business post-petition permits an individual operating a business as a sole proprietorship to continue to operate the business, but the court stated that the debtor had excluded himself from the class of self-employed debtors contemplated by Section 1304 by operating his business as an LLC, and Section 1304 thus did not authorize the extension of the automatic stay to the debtor’s LLC. The court also denied the debtor’s request for extension of the stay as an exercise of the court’s extraordinary powers under Section 105(a). The court distinguished case law relied upon by the debtor and concluded that such action would be contrary to the Bankruptcy Code. Finally, the court rejected the debtor’s argument that the automatic stay extended to the property of the debtor’s LLC under a “property of the estate” theory. The court agreed with the debtor that his interest in the LLC became property of the estate, but found that the debtor’s property interest was confined to the intangible rights of ownership provided under the New York LLC statute. The court stated that it was unclear what impact the collection actions against the LLC would have on the debtor’s intangible rights of ownership (since the debtor’s petition alleged that his shares in the LLC had no value and the debtor admitted at the hearing that the LLC was essentially a shell), and the debtor provided the court no evidence that the pending actions against the LLC would have any immediate adverse economic impact on the estate’s interest in the LLC.

Smith v. Teel

175 P.3d 960, No. 104,640 (Ok. App. 2007)

Applying case law from the corporate context, the court held that the veil of limited liability protection should not be pierced to impose liability on LLC members with regard to the duty to exercise reasonable care not to sell alcohol to a noticeably intoxicated person. The plaintiff’s wrongful death claim against two managers/owners of an LLC based on the LLC’s sale of alcohol to an intoxicated person failed because there was no evidence that the individual defendants personally sold alcohol to the patron involved, had knowledge that any employees served alcohol to a noticeably intoxicated person, or were present on the night in question.

02 Development, LLC v. 607 South Park, LLC

159 Cal.App.4th 609, 71 Cal.Rptr.3d 608, No B200226 (Cal. App. 2 Dist. 2008)

Application of corporate law principles regarding pre-incorporation contracts to LLC; enforceability of pre-organization contract adopted by LLC after LLC came into existence.

In re Wheelus (Tarpon Point, LLC v. Wheelus)

Bankruptcy No. 07-30114-JDW, Adversary No. 07-3022, 2008 WL 372470 (Bankr. M.D. Ga. Feb. 11, 2008)

Lack of fiduciary capacity of members/managers under Georgia LLC statute for purposes of dischargeability exception for defalcation in fiduciary capacity.

Young v. Young

881 N.E.2d 1, No. 09A05-0701-CV-52 (Ind. App. 2007)

Spouse’s entitlement to child support credit for children’s health insurance premiums paid by wholly owned LLC based on case law in S corporation context.

Cooper v. Coldwell Banker

Civil Action No. 07-1208, 2007 WL 4792982 (W.D. La. Dec. 2, 2007)

Limited liability of member of Louisiana LLC in absence of allegations that member participated in racial discrimination or engaged in individual acts outside his capacity of member, manager, employee or agent.

Mowbray v. Zumot

533 F.Supp.2d 554, Civil No. L-06-1606 (D. Md. Jan. 30, 2008)

Limited liability of member of Maryland LLC who signed contract in representative capacity; personal liability of individual who signed agreement in individual capacity; standing of individual to sue based on status as party to contract involving property owned by LLC.

Kaplan v. Director, Division of Taxation

23 N.J.Tax 594, 2008 WL 269022 (N.J. Tax. Jan. 8, 2008)

Unavailability of partnership tax treatment under New Jersey Gross Income Tax Act with respect to ownership of real estate as tenancies in common made up of disregarded single member LLCs in order to accomplish tax free exchange under Internal Revenue Code.

Kwon v. Yun

No. 05 Civ. 1142(GEL)(DFE), 2008 WL 190058 (S.D. N.Y. Jan. 22, 2008)

Dissolved Delaware LLC’s inability to sue after filing certificate of cancellation.

In re Enron Creditors Recovery Corp. (Enron Corporation v. Baupost Group, LLC)

380 B.R. 307, Bankruptcy No. 01 Br. 16034(AJG).Civ. Nos. 07 Civ. 7757(CM), 07 Civ. 7941 (CM)(S.D. N.Y. 2008)

Scope of “corporation” as encompassing LLC in agreement drafted before passage of LLC statute.

Castro-Vega v. Waible

Civil No. 07-675-ST, 2008 WL 342754 (D. Or. 2008)

Personal liability of LLC’s general manager and LLC’s manager and registered agent as “employers” within meaning of Fair Labor Standards Act.

Metropolitan Government of Nashville v. Printer’s Alley Theater, LLC

Nos. M2007-00329-COA-R3-CV, M2007-00391-COA-R3-CV, 2008 WL 199849 (Tenn. Ct. App. Jan. 23, 2008)

Court’s power to punish for contempt individual who was organizer, chief manager, member, and registered agent of LLC, and officer, shareholder, director, and registered agent of corporation, where entities controlled by individual violated court’s injunction against providing sexually oriented entertainment.