May 2006 — Issue 4

Hecht, Solberg, Robinson, Goldberg & Bagley v. Superior Court

137 Cal.App.4th 579, 40 Cal.Rptr.3d 446, No. D047185 (Cal. App. 2006)

Discussion of privacy rights of LLP; discoverability of insurance policies, filings with Secretary of State, and financial records of non-party LLP in malpractice action against firm arising out of firm’s representation of plaintiff in previous malpractice action against LLP.

James & Jackson, LLC v. Willie Gray, LLC

__ A.2d __, No. 59,2006, 2006 WL 659300 (Del. 2006)

The Delaware Supreme Court affirmed the Court of Chancery’s interpretation of the scope of an arbitration clause in an LLC agreement, agreeing with the Court of Chancery’s conclusion that provisions in the LLC agreement addressing injunctive relief and judicial dissolution permitted recourse to the courts in such cases. While the LLC agreement generally required arbitration of any controversy arising out of the LLC agreement in accordance with AAA rules, the agreement went on to state that a non-breaching member was entitled to injunctive relief to prevent breaches of the agreement and to obtain specific enforcement of its terms in “any action instituted in any court of the United States or any state thereof having subject matter jurisdiction thereof.” The agreement also provided for dissolution upon a “judicial determination” that an event had occurred making it unlawful, impossible, or impracticable to carry on the LLC’s business, and the agreement referred to the involvement of a “court of competent jurisdiction.” In view of these provisions, the Supreme Court agreed with the Chancery Court that the plaintiff member was not required to arbitrate its claims against the other member for injunctive relief, specific performance, and judicial dissolution. The Supreme Court disagreed with the Chancery Court’s rejection of a line of cases holding that incorporation of the AAA rules serves as clear and unmistakable evidence that the parties intended substantive arbitrability to be decided by an arbitrator. As a matter of policy, the court adopted the majority federal view that reference to AAA rules evidences a clear and unmistakable intent to submit arbitrability to an arbitrator. The court stated, however, that this view did not require an arbitrator to decide arbitrability in all cases where an arbitration clause incorporates the AAA rules, but rather only in those cases where the arbitration clause generally provides for arbitration of all disputes and incorporates a set of arbitration rules that empower an arbitrator to decide arbitrability. The court thus affirmed the lower court’s substantive arbitrability decision.

In re Grupo Dos Chiles, LLC

No.Civ.A. 1447-N, 2006 WL 668443 (Del. Ch. March 10, 2006)

In February 2000, a certificate of formation for a Delaware LLC was filed. The certificate of formation named Rivera as the initial member. The following month Shriver and Martinez (Rivera’s mother) executed a brief LLC agreement naming themselves as managing partners. In 2003, the LLC lost its good standing in Delaware because of a failure to pay Delaware taxes, and Shriver filed an action in Virginia, where the LLC was operating a restaurant, seeking a judicial winding up. In 2005, Martinez paid the LLC’s back taxes and had its good standing reinstated. Shriver then filed this action in Delaware claiming that the LLC’s membership could not be changed without an amendment to its certificate of formation since the certificate listed Rivera as the sole member. Shriver also asserted that the payment of the LLC’s back taxes and restoration of its good standing were not authorized since the action was taken without a vote of the LLC’s membership. The court stated that it need not decide whether the certificate of formation was correct in listing Rivera as the sole member when filed, finding it was immaterial whether Rivera was the initial member. The court said it was clear that Shriver and Martinez were the members under the LLC agreement, which superseded the certificate of formation. The court characterized the certificate of formation as the first statutory step in creating an LLC and stated that the Delaware LLC statute contemplates the certificate will be complemented by an agreement. The court found that the agreement made it clear that Martinez and Shriver were to be the members even though it referred to them as the managing partners. The court also pointed to other documentary evidence (loan documents, correspondence, and other documents) indicating Martinez and Shriver were the members. The court found no obligation to amend the certificate of formation, stating that there was no indication that the identification of Rivera as the initial member was not accurate when filed, and pointing out that the Delaware statute does not require that the members be set out in the certificate of formation. With respect to the payment of the LLC’s back taxes and restoration of its good standing, the court found that the act was not proper under the unique circumstances in this case. The court stated that it need not determine whether restoring the good standing of an LLC that has been cancelled for failure to pay its taxes is a ministerial act that any member or manager may take without a vote of the members. The court characterized the narrow issue in this case as follows: “The issue is whether once an LLC has lost its good standing for nonpayment of taxes and the member attempting to restore good standing represents less than a majority of the voting power of the LLC and knows there is a dispute as to whether the LLC should continue and where another co-member of the LLC has initiated litigation to dissolve the company, the member with that knowledge can unilaterally restore the LLC to good standing.” The court held the LLC was not in good standing because it was not proper for Martinez to restore its good standing without Shriver’s consent.

Lourdes Medical Pavilion, LLC v. Catholic Healthcare Partners, Inc.

No. Civ.A. 5:03CV231M, 2006 WL 753080 (W.D. Ky. March 22, 2006)

A non-profit hospital and a group of corporate entities each owned 50% of a Kentucky LLC engaged in health care services. The LLC’s operating agreement contained a non-competition provision, and a separate non-competition agreement between the LLC and the hospital’s sole member prohibited the hospital’s member and its affiliates from engaging in competition with the LLC. The LLC filed a lawsuit against the hospital’s sole member (Catholic Healthcare Partners, Inc. or “CHP”), alleging breach of the non-competition agreement based on CHP’s plans to build new medical offices for outpatient surgery services. CHP sought dismissal of the suit on the grounds the LLC did not have the corporate authority to bring the suit. The court reviewed the operating agreement and concluded that the LLC was not authorized to file suit because the decision did not receive the vote of a majority of the board of directors of the LLC as required for such a decision under the operating agreement. The LLC argued that it did not need a majority vote of the board of directors because the operating agreement permitted a member to authorize a suit based on the breach of another member. The court rejected this argument because CHP was not itself a member; rather it was the sole member of a member of the LLC. Finally, the court rejected the argument that a member could bring a derivative suit on behalf of the LLC under the derivative suit provisions of the Kentucky LLC act. The court pointed out that the derivative suit provisions of the Kentucky LLC statute may be varied in a written operating agreement. The court found the statutory provisions were overridden by the provisions of the LLC operating agreement requiring “any act” of the LLC to be authorized by a majority vote of the board of directors. The court, however, refused to dismiss the case even though it found it was not authorized, relying on a provision of the Kentucky LLC statute stating that lack of authority of a member or manager to file suit on behalf of an LLC may not be used as a defense to an action filed by the LLC.

Mayeux v. Winder

131 P.3d 85, No. 25,355 (N. M. App. 2005)

Two couples formed an LLC to purchase and develop real estate. The plaintiffs, Mr. and Mrs. Mayeux, filed this suit alleging that the defendant, the sole managing member, breached his fiduciary duty by misappropriating funds and that he breached the covenant of good faith and fair dealing. After a bench trial, the trial court found for the defendant on these claims. On appeal, the plaintiffs argued that the trial court incorrectly placed the burden of proof on the plaintiffs on their breach of fiduciary duty claim and applied an incorrect substantive standard to their claim. The plaintiffs argued that the burden of proof was on the defendant to show that his dealings were proper based on case law in other jurisdictions imposing the burden on the defendant in breach of fiduciary duty cases. The court stated that imposing the burden on the defendant might be appropriate when there is a facial showing of self-dealing, but the court did not characterize most of the expenditures challenged by the plaintiffs in this case as presumptively suspect. The court stated that the plaintiffs’ allegations involved a series of relatively small expenditures benefitting other companies owned by the defendant, and most of the expenditures were of a type that were presumptively legitimate. The court said the defendant’s testimony explained how the expenses were allocated and reimbursed among his several companies. The court also found it significant that Mrs. Mayeux was involved in the LLC’s record keeping and aware of its financial affairs. In sum, the court held that the burden of proof remains on the plaintiff in a case where the challenged expenditures themselves do not create a presumption of self-dealing, and the plaintiff is involved in the financial affairs of the company such that the plaintiff has access to the entity’s records. The court also concluded that the trial court did not apply an incorrect substantive standard to the plaintiffs’ breach of fiduciary duty claim. The plaintiffs argued that the trial court’s finding that the plaintiff performed his job in good faith and in the best interest of the company indicated that the trial court was unaware of the higher standard applicable to fiduciary relationships. The court agreed that a fiduciary relationship imposes a duty higher than the duty of good faith and fair dealing implied in all contractual relationships, but disagreed that the court’s statement that the defendant satisfied that obligation indicated that the court did not apply the correct fiduciary duty standard. The court pointed out that the plaintiff had also alleged a breach of the covenant of good faith and fair dealing, and it was thus not surprising the court would make a finding in such terms. The court concluded the trial court was aware of the distinction between the breach of contract and breach of fiduciary duty theories because the trial court mentioned both theories when it stated that it was satisfied that the defendant did not breach his fiduciary duty to the plaintiffs or breach his contract with them. The court concluded the evidence did not show the trial court erred in finding no breach of fiduciary duty under either a substantial evidence or abuse of discretion standard of review.

Horning v. Horning Construction, LLC

__ N.Y.S.2d __, No. 2006/00477, 2006 WL 738716 (N.Y. Sup. March 21, 2006)

Horning brought this action for judicial dissolution of Horning Construction, LLC, a New York LLC engaged in the commercial construction business. The construction business was originally formed and operated by Horning as a corporation. In order to lessen his workload, Horning formed a new LLC to take over the business of the corporation and brought in two individuals as co-members of the LLC. Horning intended that his co-members would share in the day to day responsibilities in return for the 1/3 interest each received in the LLC. Horning and his fellow members failed to agree on the terms of an operating agreement, and their relationship deteriorated. Horning contended his co-members did not assume their anticipated duties and he offered to sell the LLC to them, but they could not agree on the terms of a sale. Horning filed a suit to dissolve the LLC and sought appointment of a liquidating receiver. The court concluded that the standard for judicial dissolution under the New York LLC statute was not met and rejected Horning’s argument that New York LLC case law stood for the proposition that dissolution was required whenever a member desired to sever the LLC relationship and there was no operating agreement. The court noted that amendments to the LLC statute eliminating default withdrawal and dissolution rights left the judicial dissolution remedy as the sole means of obtaining dissolution in the absence of an operating agreement. The statute provides for judicial dissolution “whenever it is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement.” Though the parties were having disagreements and Horning was unhappy with the situation, the business was thriving and there was no deadlock. The court stated it could sympathize with Horning’s plight, but stated that courts had rejected dissolution petitions in similar and worse scenarios under more liberal standards designed to protect minority interests in the corporate context. The court hinted that other oppression-based remedies might be available in some circumstances, noting that it need not consider whether any other remedy was available to Horning since he had only sought involuntary dissolution.

Ex parte Miller, Hamilton, Snider, & Odom

__ So.2d __, No. 1050200, 2006 WL 573931 (Ala. 2006)

Determination of applicable venue statute in case against LLC.

Wallasey Tenants Association, Inc. v. Varner

892 A.2d 1135 (D.C. App. 2006)

Effect of individual’s transfer of property to wholly owned LLC under Tenant Opportunity to Purchase Act.

Winzer v. EHCA Dunwoody

277 Ga.App. 710, 627 S.E.2d 426, Nos. A05A2049, A05A1279 (Ga. App. 2006)

Requirement that LLC be represented in court by licensed attorney.

Patel v. Patel

280 Ga. 292, 627 S.E.2d 21, No. S06A0342 Ga. 2006)

Lack of grounds for receivership of LLC.

First Taunton Financial Corp. v. Arlington Land Acquisition-99, LLC

No. 034449BLS, 2006 WL 696689 (Mass. Super. Feb. 27, 2006)

Availability of derivative suit in LLC context; intra-enterprise loan versus capital contribution; exculpation; indemnification.

Signature Villas, L.L.C. v. City of Ann Arbor

269 Mich.App. 694, __ N.W.2d __, No. 264003, 2006 WL 786860 (Mich. App. 2006)

Transfer of ownership of LLC parent as transfer of property held by LLC subsidiary for reassessment purposes under General Property Tax Act.

Disciplinary Counsel v. Kafele

843 N.E.2d 169 (Ohio 2006)

Unauthorized practice of law by non-lawyer member who prepared and filed documents for LLC in litigation against LLC.

Metcalf v. Lincoln Logs International, LLC

No. 2:03-CV-332, 2006 WL 335595 (E.D. Tenn. Feb. 13, 2006)

Liability of related corporation for LLC liability on joint venture basis; lack of basis to hold individual officer and spouse liable as LLC’s alter ego.

International Brotherhood of Electrical Workers Local Union 159 v. Circuit Electric, L.L.C.

No. 05-C-613-S, 2006 WL 623792 (W.D. Wis. March 10, 2006)

Analysis of evidence of single employer and alter ego veil piercing to impose liability on related LLC; analysis of evidence of veil piercing to impose liability on individual member.