May 2009 — Issue 39

Mickman v. American International Processing, L.L.C.

Civil Action No. 3869-VCP, 2009 WL 891807 (Del. Ch. March 23, 2009)

Mickman sought to inspect the books and records of an LLC, and the LLC opposed her efforts and sought summary judgment on the basis that she was not a member or manager of the LLC. The Delaware LLC statute confers inspection rights upon each member and manager of an LLC, and the written operating agreement did not identify Mickman as a member. The LLC argued that the court should look for guidance to corporate law, under which only shareholders listed on the stock ledger are recognized as record holders for purposes of inspection rights, and that, where a written operating agreement exists, only members listed in the operating agreement should be recognized as members with a right to inspect the LLC's books and records. The court rejected the analogy to corporate law, pointing out that the Delaware Supreme Court case principally relied upon by the LLC dealt only with stock corporations. Further, the court stated that the policy considerations underlying the Delaware Supreme Court's decision in that case did not translate readily to the circumstances in this case. Inasmuch as LLCs are generally created on a less formal basis than corporations and are basically creatures of contract, the court stated that it was reasonable to consider evidence beyond the four corners of the operating agreement, where, as in this case, admissible evidence suggests the parties intended for the plaintiff to be a member. Although the operating agreement did not list the plaintiff as a member, other documents signed by the two members listed in the LLC agreement, one of which was the plaintiff's husband, supported a reasonable inference that the plaintiff was a member. The other documents included the LLC's tax return and the K-1's of the members as well as an Offer of Compromise to the IRS signed by the plaintiff's husband. The LLC argued that the representations in these documents were mistakes, but the court stated that they raised factual issues that could not be determined at the summary judgment stage. Mickman sought to inspect the books and records of an LLC, and the LLC opposed her efforts and sought summary judgment on the basis that she was not a member or manager of the LLC. The Delaware LLC statute confers inspection rights upon each member and manager of an LLC, and the written operating agreement did not identify Mickman as a member. The LLC argued that the court should look for guidance to corporate law, under which only shareholders listed on the stock ledger are recognized as record holders for purposes of inspection rights, and that, where a written operating agreement exists, only members listed in the operating agreement should be recognized as members with a right to inspect the LLC's books and records. The court rejected the analogy to corporate law, pointing out that the Delaware Supreme Court case principally relied upon by the LLC dealt only with stock corporations. Further, the court stated that the policy considerations underlying the Delaware Supreme Court's decision in that case did not translate readily to the circumstances in this case. Inasmuch as LLCs are generally created on a less formal basis than corporations and are basically creatures of contract, the court stated that it was reasonable to consider evidence beyond the four corners of the operating agreement, where, as in this case, admissible evidence suggests the parties intended for the plaintiff to be a member. Although the operating agreement did not list the plaintiff as a member, other documents signed by the two members listed in the LLC agreement, one of which was the plaintiff's husband, supported a reasonable inference that the plaintiff was a member. The other documents included the LLC's tax return and the K-1's of the members as well as an Offer of Compromise to the IRS signed by the plaintiff's husband. The LLC argued that the representations in these documents were mistakes, but the court stated that they raised factual issues that could not be determined at the summary judgment stage. Mickman sought to inspect the books and records of an LLC, and the LLC opposed her efforts and sought summary judgment on the basis that she was not a member or manager of the LLC. The Delaware LLC statute confers inspection rights upon each member and manager of an LLC, and the written operating agreement did not identify Mickman as a member. The LLC argued that the court should look for guidance to corporate law, under which only shareholders listed on the stock ledger are recognized as record holders for purposes of inspection rights, and that, where a written operating agreement exists, only members listed in the operating agreement should be recognized as members with a right to inspect the LLC's books and records. The court rejected the analogy to corporate law, pointing out that the Delaware Supreme Court case principally relied upon by the LLC dealt only with stock corporations. Further, the court stated that the policy considerations underlying the Delaware Supreme Court's decision in that case did not translate readily to the circumstances in this case. Inasmuch as LLCs are generally created on a less formal basis than corporations and are basically creatures of contract, the court stated that it was reasonable to consider evidence beyond the four corners of the operating agreement, where, as in this case, admissible evidence suggests the parties intended for the plaintiff to be a member. Although the operating agreement did not list the plaintiff as a member, other documents signed by the two members listed in the LLC agreement, one of which was the plaintiff's husband, supported a reasonable inference that the plaintiff was a member. The other documents included the LLC's tax return and the K-1's of the members as well as an Offer of Compromise to the IRS signed by the plaintiff's husband. The LLC argued that the representations in these documents were mistakes, but the court stated that they raised factual issues that could not be determined at the summary judgment stage. Mickman sought to inspect the books and records of an LLC, and the LLC opposed her efforts and sought summary judgment on the basis that she was not a member or manager of the LLC. The Delaware LLC statute confers inspection rights upon each member and manager of an LLC, and the written operating agreement did not identify Mickman as a member. The LLC argued that the court should look for guidance to corporate law, under which only shareholders listed on the stock ledger are recognized as record holders for purposes of inspection rights, and that, where a written operating agreement exists, only members listed in the operating agreement should be recognized as members with a right to inspect the LLC's books and records. The court rejected the analogy to corporate law, pointing out that the Delaware Supreme Court case principally relied upon by the LLC dealt only with stock corporations. Further, the court stated that the policy considerations underlying the Delaware Supreme Court's decision in that case did not translate readily to the circumstances in this case. Inasmuch as LLCs are generally created on a less formal basis than corporations and are basically creatures of contract, the court stated that it was reasonable to consider evidence beyond the four corners of the operating agreement, where, as in this case, admissible evidence suggests the parties intended for the plaintiff to be a member. Although the operating agreement did not list the plaintiff as a member, other documents signed by the two members listed in the LLC agreement, one of which was the plaintiff's husband, supported a reasonable inference that the plaintiff was a member. The other documents included the LLC's tax return and the K-1's of the members as well as an Offer of Compromise to the IRS signed by the plaintiff's husband. The LLC argued that the representations in these documents were mistakes, but the court stated that they raised factual issues that could not be determined at the summary judgment stage. Mickman sought to inspect the books and records of an LLC, and the LLC opposed her efforts and sought summary judgment on the basis that she was not a member or manager of the LLC. The Delaware LLC statute confers inspection rights upon each member and manager of an LLC, and the written operating agreement did not identify Mickman as a member. The LLC argued that the court should look for guidance to corporate law, under which only shareholders listed on the stock ledger are recognized as record holders for purposes of inspection rights, and that, where a written operating agreement exists, only members listed in the operating agreement should be recognized as members with a right to inspect the LLC's books and records. The court rejected the analogy to corporate law, pointing out that the Delaware Supreme Court case principally relied upon by the LLC dealt only with stock corporations. Further, the court stated that the policy considerations underlying the Delaware Supreme Court's decision in that case did not translate readily to the circumstances in this case. Inasmuch as LLCs are generally created on a less formal basis than corporations and are basically creatures of contract, the court stated that it was reasonable to consider evidence beyond the four corners of the operating agreement, where, as in this case, admissible evidence suggests the parties intended for the plaintiff to be a member. Although the operating agreement did not list the plaintiff as a member, other documents signed by the two members listed in the LLC agreement, one of which was the plaintiff's husband, supported a reasonable inference that the plaintiff was a member. The other documents included the LLC's tax return and the K-1's of the members as well as an Offer of Compromise to the IRS signed by the plaintiff's husband. The LLC argued that the representations in these documents were mistakes, but the court stated that they raised factual issues that could not be determined at the summary judgment stage. Mickman sought to inspect the books and records of an LLC, and the LLC opposed her efforts and sought summary judgment on the basis that she was not a member or manager of the LLC. The Delaware LLC statute confers inspection rights upon each member and manager of an LLC, and the written operating agreement did not identify Mickman as a member. The LLC argued that the court should look for guidance to corporate law, under which only shareholders listed on the stock ledger are recognized as record holders for purposes of inspection rights, and that, where a written operating agreement exists, only members listed in the operating agreement should be recognized as members with a right to inspect the LLC's books and records. The court rejected the analogy to corporate law, pointing out that the Delaware Supreme Court case principally relied upon by the LLC dealt only with stock corporations. Further, the court stated that the policy considerations underlying the Delaware Supreme Court's decision in that case did not translate readily to the circumstances in this case. Inasmuch as LLCs are generally created on a less formal basis than corporations and are basically creatures of contract, the court stated that it was reasonable to consider evidence beyond the four corners of the operating agreement, where, as in this case, admissible evidence suggests the parties intended for the plaintiff to be a member. Although the operating agreement did not list the plaintiff as a member, other documents signed by the two members listed in the LLC agreement, one of which was the plaintiff's husband, supported a reasonable inference that the plaintiff was a member. The other documents included the LLC's tax return and the K-1's of the members as well as an Offer of Compromise to the IRS signed by the plaintiff's husband. The LLC argued that the representations in these documents were mistakes, but the court stated that they raised factual issues that could not be determined at the summary judgment stage.


In re LaHood (Heartland Bank and Trust Company v. Covey)

Bankruptcy No. 07-81727, Adversary No. 07-8156, 2009 WL 803558 (Bankr. C.D. Ill. March 19, 2009)

The LaHood brothers, Michael and Richard, were each 50% members of an Illinois LLC. The LLC’s principal asset was a piece of real estate. Michael executed a note to Richard secured by Michael’s LLC interest and by a mortgage on the LLC’s real estate. Heartland Bank obtained a judgment against Michael and served on Michael a Citation to Discover Assets. Michael filed bankruptcy, and Richard, without seeking relief from the stay, declared the LLC dissolved, asserting that Michael’s bankruptcy terminated his membership. Richard elected not to continue the business and distributed the real estate in equal shares to himself and Michael by quit claim deeds from the LLC. Richard then sought relief from the stay to foreclose the mortgage against the real estate. In this opinion, the bankruptcy court addressed a number of claims asserted by Michael, Richard, the LLC, Heartland, and the Trustee. First, the court rejected Richard’s argument that the mortgage in favor of Richard merged into his interest in the real estate acquired via the quit claim deed from the LLC and thereby caused the entire debt to burden Michael’s (i.e., the bankruptcy estate’s) interest. The court found this argument flawed because a mortgagee must receive full title to the property for the doctrine of merger to apply, and the doctrine’s effect is to extinguish or cancel indebtedness rather than shift indebtedness to a partial interest in the mortgaged property. The court next concluded that the LLC’s distribution of the real estate to Richard and Michael was invalid. Issues regarding whether the non-economic interest of Michael became property of the bankruptcy estate or whether Richard had the right to unilaterally wind up the LLC were mooted by the fact that Richard’s actions with respect to the real estate were invalid under the Illinois LLC statute and the LLC’s operating agreement. The court relied upon the winding up provisions of the Illinois LLC statute requiring that the LLC’s assets be applied to discharge the claims of creditors, including members who are creditors, before any surplus is distributed. The LLC’s operating agreement incorporated the rule in the statute and did not make provision for distributions of encumbered assets. The court thus concluded that the distribution of the real estate violated the statute and the operating agreement and was void. The court also concluded that the distribution of the real estate violated the automatic stay in Michael’s bankruptcy because the purpose of the deeds was to effect a merger so that the mortgage would be payable solely from Michael’s interest in the real estate. On this additional basis, the court concluded that the deeds were void. The court next analyzed the Illinois LLC statute and the operating agreement and concluded that Michael’s dissociation by filing for bankruptcy was not wrongful. Under the Illinois LLC statute, a dissociation is wrongful only if it is in breach of an express provision of the operating agreement. The LLC and Richard argued that Michael’s filing bankruptcy without giving written notice breached provisions of the agreement requiring written notice before a member transfers any interest in the LLC. Examining various provisions of the operating agreement, the court concluded that the provisions requiring notice of a transfer applied to a voluntary transfer and that transfers by operation of law were governed by a different provision that did not contain a notice provision. The court also rejected an argument that Michael’s dissociation was wrongful because Richard did not consent to the Trustee’s becoming a substituted member. The court stated that the Trustee was not an assignee under the provisions of the operating agreement relied upon by Richard, that bankruptcy was expressly addressed under provisions of the operating agreement contemplating the event of a member’s bankruptcy, and that Michael’s dissociation by filing bankruptcy did not breach any express provision of the operating agreement. The court next addressed Heartland’s claim that it had a valid judgment lien against Michael’s membership interest in the LLC. Inasmuch as Heartland had served on Michael a post-judgment Citation to Discover Assets, Heartland relied upon provisions of Illinois law that give rise to a lien on the judgment debtor’s property when a judgment creditor properly serves a citation on the judgment debtor. The court commented that no party had referenced the charging order provisions of the Illinois LLC statute and raised sua sponte the application of those provisions. Under the charging order provisions, a judgment creditor of an LLC member may obtain a charging order, which constitutes a lien on the judgment debtor’s distributional interest, and the charging order is the judgment creditor’s “exclusive remedy.” The court concluded that this provision could not be interpreted to mean that the charging order was in addition to other remedies, and Heartland thus did not obtain a lien on Michael’s interest when it served him with a Citation to Discover Assets. The court concluded by pointing out that the Trustee was free to seek judicial supervision of the liquidation and distribution of the LLC’s assets based on a provision of the Illinois LLC statute giving a transferee standing to apply for judicial supervision of winding up on good cause shown. The court characterized the winding up process as contemplating the sale of the LLC’s real estate, payment of the debts, including the mortgage and any taxes, and equal distribution of the proceeds to Richard and the bankruptcy estate. The court stated that the winding up process could be handled consensually, but that either Richard or the Trustee could seek judicial supervision if they could not agree on the winding up process. Finally, the court disapproved of a proposed compromise between the Trustee and Heartland regarding Heartland’s secured status under which Heartland would receive a valid, perfected lien on 80% of the bankruptcy estate’s membership interest in the LLC. The court acknowledged that the Trustee was apparently not aware of the charging order provisions when the settlement was reached, but the court stated that it was not bound by the Trustee’s mistake of law and that the compromise clearly was well below the lowest point in the range of reasonableness given that the charging order provisions set forth the exclusive remedy for a judgment creditor to obtain and enforce a lien on the economic interest that flows from membership in an LLC.


Patmon v. Hobbs

280 S.W.3d 589 (Ky. App. 2009)

A member of a Kentucky LLC brought suit, in her own name and the LLC’s name, against the LLC’s managing member, Hobbs, after learning that Hobbs had diverted three build-to-suit leases of the LLC to another company owned by Hobbs. The court concluded that, in the absence of contrary provisions in the LLC agreement, Kentucky law imposes a common law fiduciary duty of loyalty on officers and members of an LLC because LLCs are similar to partnerships and corporations. The court stated that a breach of duty of loyalty claim is based on the existence of a fiduciary duty in the principal-agent relationship. The court stated that Hobbs, as managing member, had a duty to act in the interests of the LLC and a basic duty of faithfulness and loyalty to the LLC, because members of a Kentucky LLC are generally members for the purpose of the LLC’s business, and every manager is an agent of the LLC where the articles of organization vest authority in a manager or managers. The court noted that the Kentucky LLC statute provides that a member or manager is not liable to the LLC for any act or failure to act on behalf of the LLC unless the act or omission constitutes wanton or reckless misconduct, and the statute further provides that a member or manager shall account to the LLC and hold as trustee any profit or benefit derived from use of the LLC’s property, including confidential or proprietary information, without consent of a majority of the disinterested managers or a majority in interest of the members. The court stated that the leases constituted confidential or proprietary information, and Hobbs did not obtain the requisite consent to divert the leases to his other company. The court next analyzed the duty of loyalty by analogizing to the partnership context and concluded that Hobbs violated his duty of loyalty to his fellow members and the LLC. The court further analyzed how the doctrine of misappropriation of corporate opportunity affected the analysis because the trial court relied upon the doctrine to limit the amount of damages awarded. Hobbs relied upon cases from other jurisdictions to argue that the opportunities did not exist for the LLC based on financial inability to undertake the opportunities. The court examined the corporate opportunity doctrine and concluded, as a matter of first impression, that the business opportunity doctrine applies under Kentucky law. The court then analyzed whether the LLC had the ability to undertake the opportunities diverted by Hobbs. The court concluded that, regardless of the LLC’s ability to complete the project, Hobbs should have informed the other members. The court also concluded that it was possible that the LLC could have sold the opportunity and profited in that manner had Hobbs satisfied his duty of loyalty to the LLC, and it was not possible to conclude at this stage whether the LLC would have been able to complete or sell the leases. The court stated that it was clear that Hobbs had breached his statutory and common law duty of loyalty, the first prong of the business opportunity doctrine, and the plaintiff must now have an opportunity to address the issue of whether the LLC had the ability to undertake the project. The court remanded for the trial court to determine a remedy for Hobbs’s breach of fiduciary duty and held that, at a minimum, Hobbs was required to hold in trust all benefits and profits derived by him as a result of his misuse of the build-to-suit leases. The court also commented that the trial court was authorized, based on Hobbs’s misconduct, to order the dissolution of the LLC and would need to decide, in the interest of justice, the percentages to be used in dividing the assets among the members.


Kaplan v. O.K. Technologies, L.L.C.

675 S.E.2d 133 (N.C. App. 2009)

Kaplan, Olivier, and Bowman formed a North Carolina LLC in which Kaplan owned a 51% interest, Olivier owned a 43% interest, and Bowman owned a 6% interest. Later, a fourth member, Meschan, was admitted. As a result of Meschan’s admission, Kaplan owned 41.5%, Olivier owned 37.5%, Meschan owned 15%, and Bowman owned 6%. Kaplan provided all the capital and financing for the LLC. The LLC was managed by the members, and the operating agreement specified that management decisions would be made by a majority in interest. In litigation that ensued after a dispute between Kaplan and the other members, Olivier and Bowman asserted breach of fiduciary duty claims against Kaplan. They argued that Kaplan’s relationship with them was a fiduciary relationship based on (1) Kaplan’s role as a member-manager; (2) Kaplan’s control deriving from his minority interest coupled with his control over the company’s finances and operations; and (3) Kaplan’s role as a member in a closely-held LLC. The court rejected these arguments. First, the court stated that the North Carolina LLC statute does not create fiduciary duties among members. The court compared members of an LLC to shareholders of a corporation and stated that members do not generally owe a duty to each other or the company. The court stated that Kaplan’s 41.5% interest made him a minority member, and he thus did not fit within the exception that a controlling shareholder owes a duty to minority shareholders. The court also rejected the argument that Kaplan’s status as a manager of the LLC created a fiduciary duty to the members. The court pointed out that the North Carolina LLC statute requires a manager to discharge his duties as manager in good faith with the care of an ordinary prudent person and in a manner reasonably believed to be in the best interest of the LLC. The court stated that this provision created a duty to the LLC, and the court analogized managers to corporate directors. Accordingly, the court held that managers of an LLC owe a fiduciary duty to the LLC and not to individual managers or members. The court also rejected the argument that Kaplan made the LLC completely dependent upon his financing and thus exercised such domination and control as to create a fiduciary relationship. Kaplan provided financing as provided by the operating agreement, and the other three members formed an alliance that represented a majority and had the power to make management decisions; therefore, the argument that Kaplan exercised domination and control was unconvincing. Finally, the court rejected the argument that Kaplan’s relationship with Olivier and Bowman was fiduciary in nature by virtue of their status as members in a closely-held LLC. Olivier and Bowman argued that the relationship between members of a closely-held LLC is like the fiduciary relationship between partners in a partnership. The court rejected this argument based on provisions in the operating agreement limiting the liability of the members as permitted by the North Carolina LLC statute. The court stated that the operating agreement clearly limited the members’ liability to three situations. Olivier and Bowman argued that Kaplan’s conduct fell within two of the situations for which liability was not eliminated, but the court stated that Kaplan’s liability would extend only to the LLC assuming arguendo that he breached his duties under the operating agreement.


Dudley v. Dudley

No. CA2008-07-165, 2009 WL 683702 (Ohio App. March 16, 2009)

A member’s withdrawal from an LLC triggered a dissolution and winding up under provisions of the operating agreement that provided for dissolution and winding up upon withdrawal of a member unless all remaining members voted to continue the LLC. A unanimous vote to continue was not obtained because one of the nine remaining members voted against continuation of the LLC. The LLC and a majority of its remaining members argued, however, that a unanimous vote to continue was not necessary because a majority of the remaining members amended the operating agreement to provide for continuation of the LLC upon a majority vote of the members. The court stated that the operating agreement specifically and clearly dealt with the events triggering dissolution and continuation, and the court concluded that allowing amendment of the operating agreement after the withdrawal of a member as was attempted here would effectively render that provision meaningless and severely prejudice a withdrawing member. The court thus held that the amendment could not supersede the clear language of the operating agreement regarding dissolution.


Medical Practice Solutions, LLC v. Commissioner of Internal Revenue

132 T.C. No. 7 (U.S. Tax Ct. 2009)

(validity of pre-January 1, 2009 check-the-box regulations regarding liability of single member for disregarded LLC’s unpaid employment taxes).


Sutherland v. Sutherland

No. 2399-VCL, 2009 WL 857468 (Del. Ch. March 23, 2009)

(impermissibility of charter provision treating interested directors as disinterested directors under Delaware General Corporation Law in contrast to freedom to contract under Delaware Limited Liability Company Act and Delaware Revised Uniform Limited Partnership Act).


Terminal Properties, Inc. v. Hampton Propane Terminal, L.C.

No. 07-2155, 2009 WL 776652 (Iowa App. March 26, 2009)

(standards of conduct of LLC managers and application of business judgment rule to LLC managers; validity of action by members involving alleged conflict of interest).


Gaunce v. Wertz

No. 1:06-CV-00095-R, 2009 WL 803843 (W.D. Ky. March 25, 2009)

(discussion of fiduciary duties and liabilities of members of Kentucky LLCs; interpretation of operating agreement regarding authority of managing member and requisite consent of members for acts on behalf of LLC).


Middlesex Retirement System, LLC v. Board of Assessors of Billerica

903 N.E.2d 210 (Mass. 2009)

(inapplicability of tax exemption to LLC’s real property although LLC owned by governmental entity).


CFM Buckley/North, LLC v. Board of Assessors of Greenfield

902 N.E.2d 381 (Mass. 2009)

(inapplicability of tax exemption to single member LLC owned by charitable organization where tax exemption limited to incorporated organizations).


Cater v. State

5 So.3d 391 (Miss. 2009)

(interpretation of term “person” in criminal false pretenses statute as including LLC among potential victims under statute).


W.R. Huff Asset Management Co., L.L.C. v. William Soroka 1989 Trust

Civ. Action No. 04-3093 (KSH), 2009 WL 606152 (D.N.J. March 9, 2009)

(interpretation of transfer restrictions in LLC operating agreement and valuation of decedent’s interest in LLC).


Kwon v. Yun

606 F.Supp.2d 344 (S.D.N.Y. 2009)

(interpretation of Delaware LLC statute and action by Delaware Chancery Court with respect to revival of dissolved LLC by appointment of trustee to pursue LLC’s claim).


Sanitary District No. 4-Town of Brookfield v. City of Brookfield

767 N.W.2d 316 (Wis. App. 2009)

(sufficiency of verbal authorization at meeting of members to authorize LLC action).