October 2007 — Issue 20

Thompson v. Deloitte & Touche LLP

__ F.Supp.3d __, 2007 WL 2409737, No. 4:07-cv-00067 (S.D. Iowa 2007).

The court held that an LLP’s citizenship is determined by the citizenship of all partners and that the presence of one “stateless” partner thus renders the partnership stateless and destroys diversity jurisdiction. Further, even if the stateless partner were excluded from consideration, partners who were not United States citizens destroyed diversity jurisdiction because diversity jurisdiction cannot be maintained where aliens are on opposite sides of an action, and there were alien plaintiffs present in the case.

The Follieri Group, LLC v. Follieri/Yucaipa Investments, LLC

No. Civ.A. 3015-VCL, 2007 WL 2459226 (Del. Ch. Aug. 23, 2007).

The court denied a putative creditor’s request to intervene in a proceeding to judicially dissolve an LLC. The claimant had filed an action to collect on an alleged debt of the LLC in New Jersey, and the claimant argued it was entitled to intervene because the litigation could adversely affect its ability to collect its debt from the LLC. The court concluded that merely having a claim against an LLC for payment of money does not give a claimant any interest in the LLC or in an action to dissolve the LLC, and there was thus no right to intervene under Rule 24(a). The court pointed out that any judgment entered in the judicial dissolution action would not threaten the claimant with an adverse effect because the winding up and distribution provisions of the Delaware LLC statute protect the interests of creditors. Under these provisions, a dissolved LLC must make reasonable provision to pay any claim which is the subject of a pending action before any distribution to members. The court also found no basis to permit intervention under Rule 24(b) because the claimant’s claim for payment against the LLC and the dissolution action (in which the question was whether or not it was reasonably practicable to carry on the business of the LLC in conformity with the LLC agreement) did not have any question of law or fact in common.

Roth v. Voodoo BBQ, LLC

__ So.2d __, 2007 WL 2473270, No. 2007-CA-0295 (La. App. 2007).

The plaintiffs leased premises to an LLC, and the premises were abandoned after they were damaged in Hurricane Katrina. The plaintiffs sought to hold the managers of the LLC liable for “acquiescing, fostering, or permitting” the LLC’s failure to adequately secure and maintain the premises before and after the hurricane. The plaintiff later amended the petition to add allegations that the managers entered the premises following the hurricane and removed equipment and furnishings. The court quoted the provisions of the Louisiana LLC statute providing that members, managers, and agents of an LLC are not liable for the debts, obligations, or liabilities of the LLC. The plaintiffs argued that they had alleged individual tortious acts separate and apart from the defendants’ roles as managers, but the court held that the petition did not sufficiently allege wrongful conduct separable from the roles of the defendants as managers. In particular, the court noted that the thrust of the litigation was a breach of contract action against the LLC and that the property allegedly removed from the leased premises belonged to the LLC. Thus, the allegations necessarily related to decisions regarding property owned and used by the LLC. The court added that there were no particularized allegations of fraud and that the allegations were insufficient to pierce the veil of LLC statutory protection afforded members and managers.

In re Modanlo

2007 WL 2609470, Nos. 05-26549-NVA, 06-10158-NVA (Bankr. D. Md. May 19, 2007).

The court determined that a debtor’s single member Delaware LLC, which dissolved upon the debtor’s bankruptcy, was resuscitated by the actions of the debtor’s trustee (acting as the debtor’s personal representative) and that the trustee possessed management rights in the LLC in addition to the debtor’s economic interest. Based on this determination, the court granted the trustee’s request for leave to cause the LLC to call a meeting of shareholders in a corporation in which the LLC was the controlling shareholder. The debtor argued that the trustee acquired only economic rights in the LLC (and no rights to control and make decisions for the LLC) because, under Sections 18-304 and 18-801 of the Delaware Limited Liability Company Act, the debtor ceased to be a member and the LLC dissolved upon the filing of the member’s bankruptcy. The court, however, agreed with the trustee’s argument that he had revoked the dissolution, as provided under Section 18-806 of the Delaware LLC statute, by taking action that amounted to a written consent to continuation of the LLC, admission of the trustee as a member, and appointment of himself as manager. The debtor argued that, even if the actions taken by the trustee were otherwise sufficient to revive the LLC, the statute only permitted the actions to be taken by the “personal representative” of the last remaining member. The Delaware LLC statute defines the term “personal representative” in the context of a natural person as the “executor, administrator, guardian, conservator, or other legal representative” of the person, and the court concluded that the term includes a bankruptcy trustee. The court distinguished Delaware case law holding that an LLC member’s management or governance rights are not assignable because the case law was decided in the context of a multi-member LLC. The court cited with approval and characterized as “persuasive” the opinion of a Colorado bankruptcy court in In re Albright. Although the parties did not raise Sections 18-702 and 18-704 of the Delaware LLC statute (requiring the approval of all members other than the assigning member to admit an assignee as a member), the court stated that these provisions are inapplicable in the context of a single member LLC since there are no members other than the assigning member. The court again referred to the Albright decision as persuasive and concluded that these provisions of the Delaware statute did not preclude the trustee from exercising management rights.

Lynes v. Helm

__ P.3d __, 2007 WL 2601810, No. 05-724 (Mont. 2007).

Lynes and others formed a Montana LLC, and Lynes pledged personal assets to secure a bank loan to the LLC. When ticket sales for a concert arranged by the LLC were poor and the LLC was faced with the possibility of having to cancel the concert, some of the members of the LLC supplied funds to pay the bands so that the concert could take place. The income from the concert was not enough to pay all of the costs of the concert, and additional investments were solicited from the members. After receiving the additional investments, the LLC was able to reimburse the members who advanced funds to pay the bands, as well as pay local creditors and repay part of the bank loan, but the balance of the bank loan was not paid, and Lynes ultimately paid the loan personally. Lynes and the LLC sued the members who advanced the funds to pay the bands, alleging that the LLC’s repayment of the funds advanced by the members was an unlawful distribution of capital contributions that left the LLC unable to pay its debts. Lynes relied upon the Montana Limited Liability Company Act, which prohibits a distribution (i.e., a transfer of money, property, or other benefit to a member in the member’s capacity as a member) if the distribution renders the LLC unable to pay its debts, and imposes liability to the LLC when a member of manager assents to a distribution in violation of the statute. The court agreed with the members that the funds supplied by the members were loans and that the repayment was not contrary to law. The court relied upon provisions of the Montana LLC statute that require an LLC to reimburse and indemnify a member or manager for payments made or liabilities incurred in the ordinary course of business of the LLC or for the preservation of its business or properties. The court characterized the payments as occurring in the ordinary course of business for the benefit of the LLC and to preserve its business. Although the members were acting in a managerial role when they authorized the LLC to reimburse them, the court noted that the statute permits a member, even in a managerial position, to lend money to and transact other business with the LLC and requires the LLC to repay amounts loaned to the LLC. Thus, the LLC had both the obligation and right to repay the members. The court also rejected an argument by Lynes that there was a material issue of fact as to whether the members breached their duty of loyalty to the LLC and acted as persons with an interest adverse to the LLC when they repaid themselves. The court quoted the Montana statutory provisions that state the only duties owed by a member of a member-managed LLC are the duty of care and duty of loyalty and that limit the duty of loyalty to certain matters, including refraining from dealing with the LLC on behalf of a party or as a person having an interest adverse to the LLC. The court stated that the uncontested facts showed the LLC had more debt than it could pay, and the court noted that Lynes had acknowledged in his brief that the decision on which debts should be paid first was simply a business decision. The court stated that a debtor may pay one creditor in preference to another and that the members did not breach their duty of loyalty by paying themselves first.

Pinnacle Labs, LLC v. Goldberg

No. 07-C-196-S, 2007 WL 2572275 (W.D. Wis. Sept. 5, 2007).

Two individuals, Goldberg and Palen, formed a Minnesota LLC for the purpose of acquiring a business located in Wisconsin called Jennico2. Under the terms of a loan agreement with Larson, an owner of Jennico2, the LLC acquired the assets of Jennico2. The LLC had the right to operate the business for 60 days while it conducted due diligence and determined whether it wished to retain the assets. In addition, if the LLC exercised the put option, Goldberg and Palen were obligated to transfer their membership interests to Larson, and the LLC was to act as liquidating agent to wind up and liquidate Jennico2's business. During the 60-day option period, the LLC suffered a significant net loss, and the LLC exercised the put option near the end of the 60-day period. Financial statements of the LLC during the 60-day option period reflected that liabilities exceeded assets. The LLC, through Goldberg and Palen, operated the assets for a period of about three weeks thereafter as liquidating agent at which time Larson terminated the association of Goldberg and Palen with the LLC as liquidating agents. Larson and the LLC sued Goldberg and Palen, alleging that Goldberg and Palen, as governors and managers, breached fiduciary duties to the LLC, breached fiduciary duties to Larson as a secured lender, and maliciously injured the LLC in violation of a Wisconsin statute. Goldberg and Palen sought summary judgment, arguing that the claim for breach of fiduciary duty to the LLC was an inappropriate derivative action, that they owed no fiduciary duty to Larson, that Wisconsin law was inapplicable, and that all the claims were precluded because the defendants’ conduct fell within the protection of the business judgment rule. The court first held that all the claims were governed by Minnesota law since the Wisconsin LLC statute provides that the laws of the state under which an LLC is organized shall govern the LLC’s organization and internal affairs and the liability and authority of its managers and members. With respect to the claim that Goldberg and Palen breached fiduciary duties to the LLC, the defendants argued that the action was a disguised derivative action precluded by the fact that Larson was not a member of the LLC during the period of actionable conduct, and that the conduct fell within the protection of the business judgment rule in any event. The court stated that the defendants might be correct in asserting that the claim was a derivative action to the extent asserted by Larson, but the court pointed out that the LLC itself was bringing the claim on its own behalf. The court then discussed the business judgment rule under Minnesota law, citing the Minnesota LLC statute, which provides that a manager shall discharge the duties of an office in good faith, in a manner reasonably believed to be in the best interests of the LLC, and with the care an ordinarily prudent person would exercise under similar circumstances. The court quoted case law in the corporate context and stated that a plaintiff, to overcome the presumption that a business decision is consistent with fiduciary duties, must present evidence of a breach of the three essential components of fiduciary duty – good faith, loyalty, and due care. The court stated that the plaintiff must demonstrate gross negligence to prove a lack of due care. The court concluded that some of the conduct in the plaintiffs’ litany of alleged improper actions was clearly protected by the business judgment rule, but found that several allegations arguably fell outside the realm of business judgment and tended to demonstrate gross negligence. In addition, the court stated that certain payments to the defendants for management services raised the issue of whether they personally benefitted as creditors by inappropriate cash payments that implicated the good faith and loyalty components of the business judgment rule. The court next addressed Larson’s argument that the defendants assumed a trustee role as a result of the debtor-creditor relationship. The court stated that there was no basis for such a claim under the loan documents or Minnesota law. The court stated that Minnesota law expressly rejects the notion that a trust relationship or a duty to manage the company for the benefit of creditors arises under these circumstances. The court acknowledged that Minnesota law recognizes that managers of a corporation become fiduciaries of the corporate assets for the benefit of creditors when a corporation is insolvent or on the verge of insolvency, but the court stated that the duty is limited and does not extend beyond the prohibition against self-dealing or preferential treatment. The duty is breached only if the managers’ transfer of assets enables them to recover a greater portion of their debt than other similarly situated creditors, and the burden is on the manager to show any payment to him was in good faith and not a preference. The court stated that, under this standard, allegations of mismanagement and losses resulting from allegedly poor or reckless business practices could not form the basis of a claim by Larson even if Larson could establish the conduct fell outside the business judgment rule. Larson could only prevail to the extent the defendants made preferential transfers to themselves while the LLC was insolvent or on the verge of insolvency. The court concluded that the plaintiffs had provided ample evidence of insolvency to preclude summary judgment on that issue. The court found that there existed fact issues on the preferential nature of certain management fees, but found no basis for the argument that a loan repayment was preferential. Finally, the court rejected the plaintiffs’ statutory claim for punitive damages under Wisconsin law since the action was controlled by Minnesota law, and the court concluded that there was no suggestion that the evidence could support a finding of clear and convincing evidence of malicious conduct or willful injury in any event.

Florida Estate Developers, LLC v. Ben Tobin Companies, Ltd.

__ So.2d __, 2007 WL 2480535, No. 4D06-14 (Fla. App. 2007).

Analysis of breach of fiduciary duty claims under Florida LLC statute.

Vanderford Company, Inc. v. Knudson

165 P.3d 261, Nos. 31047, 31163 (Idaho 2007).

Sufficiency of evidence to support submission of requested jury instructions on plaintiff’s argument that LLC was member’s alter ego.

Equipoise PM LLC v. International Truck and Engine Corp.

No. 05 C 6008, 2007 WL 2228621 (N.D. Ill. July 31, 2007).

Limited liability of members and managers under Delaware LLC statute; potential personal liability of members based on contractual assumption of liability or tortious acts committed, authorized, or ratified while acting for the LLC.

In re Howell (Fabing v Howell)

373 B.R. 1, Bankruptcy No. 06-32818, Adversary No. 06-03175 (Bankr. W.D. Ky. Aug. 17, 2007).

Standard of liability of LLC manager under Kentucky statute as not constituting express or technical trust within nondischargeability provisions of Bankruptcy Code.

Broussard v. Chandler

No. 2006 CA 1958, 2007 WL 2482494 (La. App. Sept. 5, 2007).

Mandatory nature of statutory requirements for winding up.

In re Mooney (LaCrubba v. Mooney)

Bankruptcy No. 05-13392-JMD, Adversary No. 05-1205-JMD, 2007 WL 2403774 (Bankr. D. N.H. Aug. 17, 2007).

Discussion of fiduciary duty of members and managers to creditors of insolvent LLC; likelihood that Massachusetts would apply corporate veil piercing principles to LLCs.

Matias v. Mondo Properties LLC

43 A.D.3d 367, 841 N.Y.S.2d 279 (N.Y. A.D. 1 Dept. 2007).

Limited liability of members; application of corporate veil piercing principles to LLCs.

EOS Partners SMIC, L.P. v. Levine

42 A.D.3d 309, 839 N.Y.S.2d 729 (N.Y. A.D. 1 Dept. 2007).

Insufficiency of complaint to establish demand futility in derivative suit asserting claims on behalf of Delaware LLC.

Mitchell, Brewer, Richardson, Adams, Burge & Boughman, PLLC v. Brewer

No. 06 CVS 6091, 2007 WL 2570749 (N.C. Super. May 8, 2007).

Interpretation of correspondence regarding law firm breakup as possible operating agreement providing for withdrawal of member; sufficiency of allegations regarding acts and omissions in conflict with LLC’s interest or involving improper personal benefit; treatment of contingent fee cases in context of dissolution of law firm LLC.

Wachovia Capital Partners, LLC v. Frank Harvey Investment Family Limited Partnership

No. 05 CVS 20568, 2007 WL 2570838 (N.C. Super. March 5, 2007).

Insufficiency of allegations to overcome protection of Delaware business judgment rule.