May 2008 — Issue 27

K.C. Properties of N.W. Arkansas, Inc. v. Lowell Investment Partners, LLC

373 Ark. 14, __ S.W.3d __, 2008 WL 659825, No. 07-471 (Ark. 2008)

Ozark Mountain Water Park, LLC (“Water Park LLC”) was formed for the purpose of operating a water park on land owned by Pinnacle Hills Realty, LLC (“Realty LLC”). Pinnacle Management Services, LLC (“Management LLC”) was the manager of Water Park LLC, and the members of Realty LLC and Management LLC were three LLCs owned by the three individuals who were the managers of Management LLC. Realty LLC sold the land to another party, and the 49% member of Water Park LLC sued the 51% member, as well as Management LLC, the individual managers of Management LLC, and the members of Realty LLC and Management LLC (i.e., the LLCs owned by the individual managers of Management LLC). The trial court granted summary judgment for the defendants. The supreme court first addressed the application of the provision of the Arkansas LLC statute protecting members and managers from liability for debts and liabilities of the LLC and the provision limiting liability of a member or manager to the LLC or other members for acts or omissions not constituting gross negligence or willful misconduct. The court held that the provision limiting liability of members and managers for debts and liabilities of the LLC was intended to prohibit suits against a member by a third party, and the court held that the only parties the 49% member of Water Park LLC could sue for gross negligence or willful misconduct were the 51% member and the manager of Water Park LLC. The court pointed out that it was Realty LLC, not the 51% member or manager of Water Park LLC, that sold the land to another party, and the court concluded that neither the 51% member nor the manager acted or failed to act in a manner constituting gross negligence or willful misconduct. The court next analyzed arguments based on agency law and the provisions of the LLC statute dealing with agency authority. The plaintiffs argued that Management LLC, through the acts of its managers and members (who were also the members of Realty LLC), caused Realty LLC to sell the property intended for the water park, and that the actions of Management LLC were imputed to the 51% member of Water Park LLC by and through their common ownership and management. The court pointed out that the individuals and their LLCs were not parties to the Water Park LLC operating agreement and that the individuals’ LLCs were acting as members of Realty LLC when the property was sold to another party. The court stated that Realty had no fiduciary duty to the plaintiffs, and the court found no basis to hold the defendants liable for breach of the operating agreement or breach of fiduciary duties. The court also affirmed the trial court’s grant of summary judgment on the plaintiffs’ claim that the veil of the LLCs should be pierced. The plaintiffs argued that there were fact issues precluding summary judgment on this claim and that the individuals, as managers of Management LLC, and the individuals’ LLCs, as members of Management LLC, were liable for the actions of Management LLC and the 51% member of Water Park LLC. The plaintiffs’ relied upon answers to interrogatories by the defendants that admitted that the LLC that was the 51% member of Water Park LLC technically had no members, no operating agreement, no books, no records, and no assets, that Realty paid all its bills, and that there had been no capital contributions or loans by the members. Based on Arkansas case law in the corporate context, however, the court concluded that the 51% member of Water Park LLC, Management LLC, and the LLCs owned by the individuals were all separate and distinct legal entities regardless of whether they included the same people. According to the court, there were no facts presented upon which the individuals’ LLCs could be held liable for the actions of Management LLC or the 51% member of Water Park LLC. The court also affirmed the trial court’s conclusions that the plaintiffs had failed to provide sufficient evidence of their claims against the individuals and their LLCs for tortious interference and promissory estoppel.

Weiner v. Weiner

No. 1:06-CV-642, 2008 WL 746960 (W.D. Mich. March 18, 2008)

The minority owner of numerous single purpose real estate entities adequately alleged a direct action for minority oppression against her brother, the majority owner of the entities. The entities included a corporation and numerous limited partnerships and LLCs. The court relied upon provisions of the Michigan LLC and corporate statutes expressly providing for minority oppression claims and noted that limited partners are free to pursue their own direct claims although the limited partnership statute does not address minority oppression claims. That the majority owner managed the jointly owned entities in accordance with the terms of the agreements governing the joint entities did not end the court’s inquiry as to oppressive conduct. The majority owner’s conduct was governed by his role as a fiduciary as well as the entity agreements. Evidence of interest-free loans by the jointly owned entities to entities owned by the majority member along with evidence of increases in management fees and lack of documentation to support the accrued management and leasing fees was sufficient to create a fact issue regarding self-dealing and resulting damages. The court stated that the evidence of interest-free loans to the majority member’s entities gave rise to a fact issue as to whether the minority member suffered an injury separate from the majority member’s injury. The court rejected the defendant’s argument that the minority member’s receipt of ownership interests in the entities as gifts, many from the defendant himself, affected her rights or altered his fiduciary obligations. The court denied the plaintiff’s request for an accounting without prejudice pending further discovery. The court urged the parties to find a resolution in order to avoid costly proceedings with a special master. The court commented that the business could no longer continue to be managed as it had been in the past and encouraged the parties to be creative in finding a solution to eliminate the conflicts of interest inherent in the current structure.

Crouse v. Mineo

658 S.E.2d 33, No. COA07-344 (N.C. App. 2008)

The court discussed the agency and management provisions of the North Carolina LLC statute and concluded that the plaintiff, a member/manager of an LLC, did not have authority to file this action on behalf of the LLC against his co-member/manager based on alleged misappropriation of LLC assets, but the plaintiff did have standing to file a derivative action. The court held that the plaintiff did not cease to be a member by filing a petition seeking dissolution of LLC. The statutory provision relied upon by the defendant states that a member who seeks for himself dissolution ceases to be a member; the provision does not cause dissociation of a member who files a petition for dissolution of the LLC of which he is a member. The court found that the plaintiff satisfied the requirement that he allege with particularity the efforts made to obtain the desired action by the LLC and the reason for failure to obtain the action. The court concluded that the plaintiff’s claims for breach of fiduciary duty related to his relationship with his co-member through the LLC and did not state an individual claim for unfair and deceptive trade practices. The court held that the statutory provision regarding judicial winding up or appointment of a person to wind up the affairs of the LLC gave the trial court discretion to do so by virtue of use of the term “may” in the statute, and the trial court did not abuse its discretion in denying plaintiff’s motion to appoint the plaintiff to wind up the affairs of the LLC.

In re Young (Rands v. Young)

384 B.R. 94, Bankruptcy No. 07-16194 (RTL), Adversary No. 07-2009 (RTL) (Bankr. D. N.J. 2008)

The court held that the three-year statute of limitations governing member liability for distributions under the New Jersey LLC statute did not apply to funds misappropriated by members and did not bar embezzlement nondischargeability claims. The court noted that neither Black’s Law Dictionary nor the LLC statute provides a definition of “distribution,” but the court stated that the typical nature of a distribution is a distribution of profits or a return of capital. The transfers in issue differed from a typical distribution in that the transfers involved alleged misappropriation of funds by a member for personal use. The court found support for its conclusion in similar provisions of the New Jersey Partnership Act, which defines a “distribution” as a transfer of money or property from a partnership to a partner in the partner’s capacity as partner or to the partner’s transferee. Since the alleged transfers were for the member’s unauthorized personal use, the court did not view the member as acting in his capacity as a member. The member argued that a distribution is any money taken out of the LLC by or for a member, relying on In re Die Fliedermaus, LLC, a New York bankruptcy case. In that case, the trustee sought to avoid distributions as fraudulent conveyances, and the court held that the three-year statute of limitations applicable to distributions under the New York LLC statute barred the avoidance action. The court stated that the types of payments in Die Fliedermaus were distinguishable because the distributions in Die Fliedermaus were challenged on the basis that they were made while the LLC was insolvent; there was no allegation of embezzlement. In addition, the court noted that the New York bankruptcy court had addressed the trustee’s breach of fiduciary duty claim separately, indicating the court recognized that taking money in breach of fiduciary duties was not a distribution subject to the three-year statute of limitations. The court next stated that, even if the court were to find the three-year statute of limitations applied in this case, disputed facts existed that could lead to tolling because the member allegedly concealed the misappropriations. The court found it unnecessary to resolve whether the member was acting in a fiduciary capacity for purposes of the nondischargeability provision because the allegations were consistent with embezzlement.

Mastroianni v. Fairfield County Paving, LLC

106 Conn.App. 330, 942 A.2d 418, No. 26732 (Conn. App. 2008)

Liability of individuals who signed lease without indicating representative capacity and prior to formation of corporation and LLC; liability of LLC on lease executed prior to formation of LLC where LLC ultimately occupied leased premises and failed to pay rent and make improvements.

TravelCenters of America , LLC v. Brog

Civil Action No. 3516-CC, 2008 WL 868107 (Del. Ch. March 31, 2008)

Dismissal of claim for access to LLC books and records for failure to allege proper purpose (relying on corporate case law regarding burden to establish proper purpose for inspection); determination that consolidation of books and records inspection counterclaim with expedited declaratory judgment action regarding LLC bylaws advance notice provision would be inappropriate.

Old National Villages, LLC v. Lenox Pines, LLC

290 Ga.App. 517, 659 S.E.2d 891, No. A07A2207 (Ga. App. 2008)

Interpretation of authority of general manager under operating agreement to enter consent judgment on behalf of LLC even though sole member had no notice of complaint or consent judgment.

University of Kansas v. Sinks

__ F.Supp.2d __, No. 06-2341-JAR, 2008 WL 755069 (D. Kan. 2008)

Limited liability of member under Kansas LLC statute; potential liability of LLC member for trademark infringement based on principle that corporate officer is personally liable for officer’s own tortious acts.

In re Kingsville Motors, Inc.

No. 04-33755-DK, 2008 WL 686724 (Bankr. D. Md. March 12, 2008)

Viability of unjust enrichment claim of LLC investors despite investors’ failure to consult attorney in connection with investment and execution of operating agreement where investors trusted long-time colleague who was LLC’s president; limitations on authority of LLC’s president despite broad management provisions of operating agreement to invest funds for purposes of LLC where stated purpose communicated to investors was acquisition of real property from corporation, not funding of corporation’s operations.

Briar Road, L.L.C. v. Lezah Stenger Homes, Inc.

__ S.W.3d __, 2008 WL 850324, No. 28592 (Mo. App. 2008)

Interpretation of Missouri LLC statute prohibiting LLC from transacting business until articles of organization have been filed and determination of enforceability of pre-formation agreement to assign rights to exercise option to LLC.

Zebrasky v. Valdes

__ N.E.2d __, 2008 WL 927780, No. 07 MA 34 (Ohio App. 2008)

Ambiguity of language in operating agreement with respect to management authority to reduce member compensation where agreement provided for compensation of members in specified amounts and stated that “no other compensation” was payable to members without vote of members.

Gonzalez v. Lehtinen

No. 13-06-441-CV, 2008 WL 668600 (Tex. App. March 13, 2008)

Sufficiency of evidence to support finding that Texas LLC was alter ego of nonresident member for purposes of exercising personal jurisdiction over member.

Serrano on California Condominium Homeowners Association v. First Pacific Development, Ltd.

143 Wash.App. 521, 178 P.3d 1059, No. 59998-4-I (Wash. App. 2008)

Determination that “effective date of dissolution” of administratively dissolved LLC is date of administrative dissolution rather than later cancellation of certificate for purposes of three-year time limit applicable to suits against dissolved LLCs.

Kite Ranch, LLC v. Powell Family of Yakima, LLC

181 P.3d 920, Nos. S-07-0196, S-07-0197 (Wyo. 2008)

Propriety of preliminary injunction enforcing management rules under Wyoming law by giving member with positive capital account exclusive management authority.