October 2011 — Issue 61

October - December 2011

LLC Cases: Wehlage v. Empres Healthcare Inc.

821 F.Supp.2d 1122 (N.D. Cal. 2011)

A nursing home resident sued the facility where she resided and various other entities, including several Washington LLCs, for violations of California health and safety, unfair competition, and consumer protection statutes. The plaintiff sought to hold the LLCs liable as alter egos of the facility. The plaintiff claimed that California law applied to the alter ego claims against the LLCs because the admission agreement between the plaintiff and the licensee had a choice-of-law clause specifying that the agreement was governed by the law of the state where the facility was located, but the court held that the alter ego issue was collateral to the admission agreement. The plaintiff also argued that the California LLC statute, which provides that the law of an LLC’s state of organization governs “its organization and internal affairs and the liability and authority of its managers and members,” only codified the “internal affairs doctrine” and that it thus does not apply to disputes involving persons or entities not part of the LLC, i.e., external substantive questions. The plaintiff relied upon case law interpreting the California statute and case law outside of California interpreting a similar statute. The defendants relied on other case law applying the law of the state of formation of an LLC or corporation on the basis that alter ego liability is a matter of internal affairs or that the state of incorporation has the greater interest in determining when and if liability protection will be stripped away. The court stated that there is no definitive authority on the issue but found the defendants’ authority more persuasive. The court stated that the statutory language providing that the law of the state of formation governs the liability and authority of an LLC’s managers and members pointed to the application of Washington law on the alter ego liability of the LLCs. Further, even though alter ego liability involves a suit by a third person, the court characterized the issue as involving an internal affair because it involves the determination of whether the owners are liable in lieu of the LLC based on the structure of the entity. Applying Washington law to the alter ego allegations, the court held that the plaintiff failed to sufficiently plead alter ego liability. For alter ego liability to be imposed under Washington law, the corporate form must be intentionally used to violate or evade a duty, and disregard must be necessary and required to prevent unjustified loss to the injured party. The plaintiff alleged that the defendant entities created a maze of undercapitalized entities, which in reality operated as a single entity, to avoid liability. The plaintiff alleged that the LLCs had financial and operational authority over the facility, but the court held that these allegations were insufficient to meet the test under Washington law. Except for conclusory statements, the plaintiff did not allege that the LLCs intentionally used the corporate form to engage in fraud or misrepresentation. Further, even if the allegations met the first part of the test, the plaintiff did not allege that the LLCs intentionally harmed her by abusing the corporate form. Although the plaintiff alleged that the facility was undercapitalized and understaffed, the plaintiff did not allege that these conditions were created with the intent to harm her or to avoid paying damages.

Walsh v. Kindred Healthcare

798 F.Supp.2d 1073 (N.D. Cal. 2011)

Residents of a skilled nursing facility sued the facility, related facilities, and parent and related corporations, LLCs, and other entities, alleging violations of California health and safety, unfair competition, and consumer protection statutes. The plaintiffs sought to hold the facilities and parent and related entities liable for the acts of one another under the alter ego doctrine. The court discussed and applied corporate alter ego principles under California law (noting that the alter ego doctrine applies equally to LLCs), and the court held that the allegations were insufficient to invoke the alter ego doctrine. Without arguing that Delaware law applied, the defendants argued that the allegations were also insufficient under Delaware law. The court noted that a forum will generally apply its own rule of law unless a party timely invokes the law of another state. The court stated that the defendants in this case had failed to make the necessary showing that application of Delaware law would further the interest of Delaware. Further, the court stated that the California governmental interest test would require the court to determine that the laws of Delaware and California were materially different in order to apply Delaware law, and the court stated that it did not appear the laws of Delaware and California were materially different on the issue of alter ego. Thus, the court applied California law. To invoke the alter ego doctrine under California law, there must be allegations that (1) there is such a unity of interest and ownership that the separate personalities of the two corporations no longer exist, and (2) if the acts are treated as the acts of only one corporation, an inequitable result will follow. The court found the allegations sufficient to allege unity of interest and ownership with respect to the parent entities and facilities, but not with respect to the relationship between the parent entities or between the facilities, and the court stated that the plaintiffs failed to allege how certain entities fit into the corporate structure and that they should be held liable for the acts of other entities or vice versa. Further, the court stated that allegations of setting up empty shells, siphoning of funds, and promotion of injustice and inequity were sufficient to allege an injustice based on the parent entities’ attempt to avoid liability, but the allegations did not clearly show whether the parent entities misused the corporate form to siphon funds from the facilities and did not allege what injustice would result if other facilities and related entities were not held liable. The court gave the plaintiffs leave to amend.

Condo v. Conners

266 P.3d 1110 (Colo. 2011)

As part of a divorce settlement, a one-third member of an LLC assigned to his wife his right to receive monetary distributions and agreed that he would vote against all matters requiring unanimous consent unless his wife directed him to do otherwise. The operating agreement of the LLC contained provisions prohibiting assignment of any portion of a member’s interest and stating that a member who wished to dispose of any part of the member’s interest must first obtain written approval of all members. The couple sought approval of the other members, but they refused to approve of the transfer. The couple went ahead with the assignment and submitted it to the divorce court without any reference to the operating agreement or consent of the other members. When the other members learned of the assignment, they expressed to the husband their concern that it violated the terms of the operating agreement and their unease that the assignment would effectively make the husband a noncontributing member and eliminate any incentive he had to assist in the LLC’s continued financial success. To resolve these concerns, the other two members offered to buy the husband’s interest, and the husband agreed to sell it to the other two members. The wife brought suit against the members for tortious interference with contract and civil conspiracy. The trial court granted summary judgment in favor of the members on the basis that the assignment from the husband to the wife was void, and the court of appeals affirmed. The supreme court likewise affirmed, but each court employed different reasoning in reaching the conclusion that the husband’s assignment to the wife was void. The trial court found that the assignment was void as against public policy because the husband’s failure to obtain the consent of the other members constituted bad faith in corporate dealings. The court of appeals concluded that the assignment was void because the operating agreement, interpreted in light of general principles of contract law, prevented the assignment of the right to distributions without consent of all members and thus rendered the assignment void. The court of appeals further held that the dispute was governed by what it believed was the supreme court’s adoption of the “classical approach” to anti-assignment clauses in a 1994 opinion. The supreme court’s analysis and reasoning was similar to that of the court of appeals, but the supreme court clarified that the opinion relied upon by the court of appeals was not a blanket rejection of the modern approach in favor of the classical approach to assignments. In its analysis, the supreme court addressed as a threshold matter the defendants’ argument that the operating agreement, because it serves as an organic document for the LLC, more closely resembles a constitution or charter than a contract and should not be interpreted in accordance with contract law. The members argued that the operating agreement serves as a “super-contract” explicitly restricting the power of a member to transfer any interest without complying with the operating agreement and that any potential exception found in contract law is irrelevant. The supreme court disagreed and held that an LLC operating agreement is a multilateral contract among the members and that it is appropriate to interpret it in light of prevailing principles of contract law. The court examined the provisions of the operating agreement and rejected two alternative arguments advanced by the wife as to why the unapproved assignment to her was effective. First, the wife argued that the assignment did not violate the anti-assignment clause because it should be narrowly interpreted to prohibit only nonconforming assignments of contractual duties. She claimed that the provision did not apply to her husband’s right to receive monetary distributions. The court did not read the provision so narrowly. The court noted that the Colorado LLC statute compelled the court to give “maximum effect” to the terms of the operating agreement. The operating agreement stated that a member shall not transfer “any portion of its interest” in the LLC without prior written approval of all members. Under the Colorado LLC statute, a membership interest in the LLC is defined to include the right to receive distributions of the LLC’s assets. The operating agreement further set forth the manner and timing of mandatory distributions, thus creating an enforceable right on the part of members. The court stated that the express limitation on transfer of “any portion” appeared to employ the broadest possible language, unlike sample language in treatises cited by the wife. Thus, like the court of appeals, the supreme court concluded that the right to receive distributions fell within the scope of the anti-assignment clause because the clause applied to “any portion” of the membership interest. Having determined that the anti-assignment clause in the operating agreement applied to the transfer of both rights and duties, the supreme court addressed whether the unapproved assignment was without any legal effect, i.e., void, or whether the husband had the power but not the right to make the assignment, i.e., the assignment was effective but constituted a breach of the operating agreement. The court again noted that the Colorado LLC statute requires that “maximum effect” be given to the terms of an operating agreement, but the court stated that giving “maximum effect” to the anti-assignment clause did not resolve whether it functioned as a duty not to assign without consent or rendered each member powerless to assign without consent. The court turned to an examination of the classical and modern approaches to anti-assignment clauses to resolve this question. Relying on Colorado case law and the Restatement (Second) of Contracts, the court concluded that the language of the operating agreement and context of the dispute rendered the husband powerless to make the unapproved assignment. The wife urged that the court should apply the modern approach to the anti-assignment clause, under which a prohibition on assignment is treated as a contractual obligation but does not restrict the power to make a nonconforming assignment unless the clause expressly states that a nonconforming assignment is “void” or “invalid.” The court pointed out that the Restatement does not adopt the strict “magic words” approach but instead looks to the language used and the context in which the contract is made to determine whether an anti-assignment clause merely creates a duty not to assign. The court discussed its previous application of the classical approach in Parrish Chiropractic Centers, P.C. v. Progressive Casualty Insurance Co., 874 P.2d 1049 (Colo. 1994) and found two of the rationales employed in that case pertinent to the resolution of this case. These two rationales were the strong public policy in favor of freedom of contract and the right of the non-assigning party to deal only with whom it contracted. The court rejected the wife’s argument that the strict “magic words” approach provides the best public policy and that other legislative enactments in Colorado evinced a clear preference for free assignability. The court explained, however, that Parrish Chiropractic was not a blanket rejection of the modern approach to assignments as the court of appeals had understood it to be. Rather, the supreme court stated that it was “narrowly” holding that the strict “magic words” approach was inapplicable in this case based on the circumstances and terms of the operating agreement. Although the court stated that the statutory directive to give “maximum effect” to the terms of the operating agreement did not resolve the effect of the assignment, it did reflect a legislative preference for freedom of contract over free alienability of membership rights. Thus, in light of the strong public policy in favor of freedom of contract, the court found that the plain language of the operating agreement rendered the husband powerless to made the unapproved assignment. Further, the court noted a clear public policy of allowing the members of a closely held LLC to tightly control who may receive either rights or duties under the operating agreement. A concurring opinion argued that the statutory directive to give “maximum effect” to the terms of the operating agreement was controlling. According to the concurring justices, giving “maximum effect” to the operating agreement meant that the unapproved assignment was void ab initio and left no room for arguments such as the wife’s that the member had the power to make an assignment and merely opened himself up to a breach-of-contract action. The concurring justices were troubled by the majority’s approach that the determination of whether an assignor has the power to make an assignment in violation of an anti-assignment clause is dependent upon the circumstances and is thus an issue to be determined on a case-by-case basis. According to the concurring opinion, “the majority’s opinion leaves LLC law unsettled and open to uncertainty.”

Meyer v. Christie

No. 07-2230-CM, 2011 WL 4857905 (D. Kan. Oct. 13, 2011)

The defendants objected to a charging order obtained by the plaintiffs with respect to interests in Kansas LLCs. The defendants argued that the charging order may conflict with the terms of the LLCs’ operating agreements relating to assignability. The court acknowledged that an operating agreement may absolutely prohibit transfers or assignments, but the court stated that such prohibition cannot prevail over other applicable law. The court explained that the Kansas Revised Limited Liability Company Act contains a provision recognizing the charging order as a remedy by which a judgment creditor of a member can seek satisfaction by petitioning a court to charge the member’s LLC interest with the amount of the judgment, and the court noted that the statute makes clear that the charging order is the only remedy by which a judgment creditor of a member can reach the member’s interest in the LLC. The court further noted that the language of the LLC statute was taken from limited partnership law, and the court stated that the language “simply authorizes the charging order and states that the charging creditor has the rights of an assignee of the LLC interest.” The court then discussed the origin and effect of the charging order under the Uniform Partnership Act of 1914, explaining that the judgment creditor is entitled only to the debtor partner’s share of distributions and is not entitled to participate in the management of the partnership. While the court indicated it understood this approach to apply generally in the LLC context, the court pointed out the provision of the Kansas LLC statute that provides an assignee has the right to participate in the management of the business and affairs of the LLC as a member where the member is the sole member of the LLC at the time of the assignment, and the court described this provision as applying to a judgment creditor with a charging order against the interest of a sole member.

Wilson v. Thorn Energy, LLC

787 F.Supp.2d 286 (S.D.N.Y. 2011)

The plaintiffs lent money to and invested in several LLCs for the purpose of offshore oil exploration. The plaintiffs sought to pierce the veil of the LLCs to hold the managing member as well as the LLCs liable for repayment of the amounts invested and lent to the LLCs. Based on New York choice-of-law rules, the court applied Delaware law, the law of the state of organization of the LLCs with respect to the veil-piercing claim. Noting that courts have applied the standard for disregarding the corporate form in the LLC context, the court relied upon the Second Circuit’s two-prong distillation of Delaware’s alter-ego standard as follows: “‘(1) whether the entities in question operated as a single economic entity, and (2) whether there was an overall element of injustice or unfairness.’” The court stated that a plaintiff must show a mingling of the operations of the entity and its owner considering various factors, including whether the entity was solvent, whether dividends were paid and other formalities observed, whether the dominant owner siphoned funds, and whether the entity generally functioned as a mere facade for the dominant owner. The court stated that some combination of these factors is required along with an overall element of injustice or unfairness, but actual fraud is not required. Applying this standard to the summary judgment evidence, the plaintiff did not conclusively establish grounds for piercing the veil. With respect to the first prong, i.e., whether the managing member and the LLCs operated as a single economic unit, there were fact issues as to whether the managing member siphoned off funds for his personal use and whether the entities were a mere facade or instrumentality for his personal activities. Because there was a fact issue on the first prong, the court did not need to examine the element of injustice or unfairness.

Hicks v. Cadle Company

809 F.Supp.2d 742 (N.D. Ohio 2011)

Hicks sought writs of execution with respect to property of Daniel Cadle in order to collect on a judgment obtained in Colorado. The property sought included Cadle’s interests in LLCs and limited partnerships, and Cadle argued that these interests were not stock and were not subject to execution under Ohio law, relying on the charging order provisions of the Ohio LLC and limited partnership statutes. In the absence of Ohio case law addressing whether a judgment creditor may seize a judgment debtor’s interest by means of a writ of execution, the court relied upon North Carolina case law holding that a judgment debtor could not subject an LLC membership interest to forced sale by means of a writ of execution in light of the North Carolina charging order statute, which is similar to Ohio’s statute. The court stated that the treatment of interests in a limited partnership should be the same in view of the parallel provisions in the limited partnership statute, and Hicks could thus only proceed against the interests in the LLCs and limited partnerships by means of a judicial charging order.

Cardwell v. Gurley

No. 4-10-CV-706, 2011 WL 6338813 (E.D. Tex. Dec. 19, 2011)

Cardwell appealed a bankruptcy court’s order granting summary judgment on Gurley’s claim that Cardwell was not entitled to discharge of his debt owed to Gurley under exceptions to discharge provided by Section 523(a)(2)(A) (false pretenses, false representation, or fraud) and 523(a)(4) (fraud or defalcation in a fiduciary capacity). In previous litigation in state court between Cardwell and Gurley, the state district court found that Cardwell and Gurley formed a Texas LLC of which they were equal members and Cardwell was designated the managing member. The state court also found that Cardwell made numerous materially false and misleading statements and promises and failed to disclose material facts which led Gurley to agree to certain transactions. The state court’s conclusions of law included conclusions that Cardwell, as managing member of the LLC, owed fiduciary duties of loyalty, care, and disclosure to the LLC, and that Cardwell also owed such duties to Gurley directly, as the only other member of the LLC, as a matter of law. The court concluded that Cardwell breached these duties and that Cardwell and the LLC were damaged while Cardwell profited by his breach. The federal district court in this case held that the bankruptcy court did not err in giving preclusive effect to the state court’s findings and conclusions and further held that the fiduciary duty owed by a managing member to his fellow LLC member was similar to the trust-type obligation owed by partners and corporate officers and thus sufficient to support an exception to discharge under Section 523(a)(4) of the Bankruptcy Code. The court discussed the requirement that a fiduciary capacity for purposes of Section 523(a)(4) must constitute a technical or express trust. The court relied on Fifth Circuit case law recognizing that persons exercising control of a business such as general partners and corporate officers owe trust-type obligations to partners and shareholders who do not control the business and that breach of such obligations is sufficient to except such persons from discharge under Section 523(a)(4). Cardwell argued that there is no authority for imposing a fiduciary duty between LLC members, but the court reasoned that the Fifth Circuit has likely not had occasion to address Section 523(a)(4) in the context of an LLC since the LLC is a relatively new form of business entity. The court noted that an LLC is a business entity that has certain characteristics of both a corporation and a partnership and that managing partners of a partnership and officers and directors of a corporation owe fiduciary duties. The court stated that the Texas Business Organizations Code does not directly address the duties owed by LLC managers to members, but the court cited Section 101.401 (permitting the company agreement to expand or restrict duties, including fiduciary duties, that a member, manager, officer, or other person has to the company or to a member or manager of the company) as an example of certain provisions that are premised on the assumption that such duties exist. Because the state court found that Cardwell, as managing member of the LLC, owed Gurley direct fiduciary duties of loyalty, care, and full disclosure as a matter of law, the federal district court saw no reason to distinguish this case, simply because the entity was an LLC, from prior Fifth Circuit precedent concluding that managing partners of partnerships and officers of corporations were not entitled to discharge under Section 523(a)(4). (The court noted that the state court had also found that Cardwell owed Gurley fiduciary duties as a result of a long-standing relationship of trust and confidence, but the court acknowledged that this type of relationship is too broad to satisfy the federal standard for fiduciary duty in a bankruptcy case.) Having concluded that Cardwell owed Gurley a fiduciary duty sufficient to meet the standard required for Section 523(a)(4), the district court next concluded that the state court’s findings regarding Cardwell’s materially false and misleading statements and promises and failures to disclose material facts met the “willful neglect” standard for a “defalcation” under Section 523(a)(4). In sum, the court held that the bankruptcy court did not err in giving preclusive effect to the state court findings and in entering judgment that Cardwell’s debt to Gurley was nondischargeable under Section 523(a)(2)(A) and 523(a)(4).

Federal Insurance Company v. Rodman, LLC

No. 3:10-CV-2042-B, 2011 WL 5921529 (N.D. Tex. Nov. 29, 2011)

Vilhauer asserted claims against Rich, Vilhauer’s co-member in an LLC that had run into financial difficulty. Vilhauer’s claims included breach of fiduciary duty. Vilhauer alleged that Rich owed Vilhauer and the LLC a fiduciary duty as an owner of the LLC and based on the trust relationship between Vilhauer and Rich. The court discussed formal and informal fiduciary relationships under Texas law. The court stated that there is no formal fiduciary relationship created as a matter of law between members of an LLC, but the court recognized that an informal fiduciary relationship may arise under particular circumstances where there is a close, personal relationship of trust and confidence. The existence of an informal fiduciary relationship is ordinarily a question of fact. Based on Vilhauer’s allegations of a long-standing friendship for more than 20 years, the court concluded that Vilhauer had sufficiently pled the existence of an informal fiduciary relationship with Rich. The court found that allegations of Rich’s conduct that left the LLC unable to pay creditors alleged breach of fiduciary duties to the LLC that could not be raised by Vilhauer, but allegations that Rich failed to perform his obligations under a separation agreement for the buyout of Rich’s interest, thus eliminating the benefit to Vilhauer of the buyout of Rich’s interest and resulting in Vilhauer’s personal liability on the LLC debts, sufficiently pled that Rich breached his fiduciary duties to Vilhauer.

Carr v. Main Carr Development, LLC

337 S.W.3d 489 (Tex. App. 2011)

Main Carr Development, LLC (“MCD”), a Delaware series LLC, was organized to engage in the development of real estate. The operating agreement identified MCD’s manager as Main Christian Brothers Development (“MCBD”), a Texas LLC. The agreement reflected that Carr was a director of MCD and provided for the establishment of eleven series LLCs to own and lease the projects contemplated by the agreement. The operating agreement did not contain an arbitration clause, and MCD did not sign the agreement. Carr, Christian Brothers Automotive Corporation (“CBAC”), and MCBD entered into a development agreement to provide for the development of projects. The development agreement contained an arbitration clause, but MCD was not a signatory to this agreement. The development agreement referred to the ownership of joint development projects “by a Delaware Series Limited Liability Company” and a buy-sell provision “more particularly described in the Operating Agreement of such Delaware Series Limited Liability Company,” but the development agreement did not specifically name MCD. MCD sued Carr, alleging breach of fiduciary duties owed under Delaware law to MCD, its series, and its members in connection with the development agreement. Carr demanded arbitration, but the trial court denied the motion to compel. On appeal, the issue for the court to resolve was whether MCD was bound to the arbitration clause as a nonsignatory. The theories addressed by the court were that MCD was third-party beneficiary of the development agreement or was estopped from avoiding arbitration because it sought and obtained benefits from the development agreement. For a nonsignatory to be bound to an arbitration clause under the third-party beneficiary theory, there must be an intent to confer a direct benefit upon a third party that is clearly and fully spelled out. The court found the reference to “a Delaware Series Limited Liability Company” and a buy-sell provision “more particularly described in the Operating Agreement of such Delaware Series Limited Liability Company” were not specific enough to show a clear intent to refer to MCD. The court also rejected the argument that a carve-out of the section referencing the Delaware series LLC in the no third-party beneficiary clause of the development agreement demonstrated that the parties intended to make the Delaware series LLC a third party beneficiary. The court did not view the no third-party beneficiary clause or the provisions carved out as pertaining to MCD, and the court rejected other arguments made by Carr that MCD was an intended beneficiary based on an interrelationship of the development agreement and operating agreement. With respect to the estoppel theory, the court concluded that MCD’s breach of fiduciary duty claim against Carr was not dependent upon the development agreement, and if the breach of fiduciary duty claim somehow related to the development agreement, the relationship was not sufficient to compel arbitration. The court characterized the breach of fiduciary duty claim as arising from general obligations imposed by Delaware law and as capable of determination without reference to the development agreement. To the extent MCD’s breach of fiduciary duty claim might require reference to a contract, the court stated that it would be the operating agreement rather than the development agreement. In sum, the court concluded that MCD’s breach of fiduciary duty claim against Carr did not depend upon a showing that Carr breached the development agreement. Further, the benefits realized by MCD, if any, were insufficient to satisfy the direct benefits estoppel test because the test does not apply where the benefits are insubstantial or indirect. Thus, the estoppel theory did not preclude MCD from suing Carr.

Ott v. Monroe

719 S.E2d 309 (Va. 2011)

Dewey and Lou Ann Monroe formed a Virginia LLC of which Dewey was an 80% member and Lou Ann was a 20% member. Dewey died and bequeathed his entire estate to his daughter, Janet. Janet claimed that she inherited her father’s membership in the LLC, but Lou Ann argued that Janet inherited only Dewey’s right to share in the profits and losses of the LLC and to receive distributions to which Dewey would have been entitled. Paragraph 2 of the operating agreement prohibited a member from transferring his membership or ownership, or any portion thereof, to any non-member without the written consent of all other members except by death, intestacy, devise, or otherwise by operation of law. Paragraph 10(B) of the operating agreement prohibited the transfer of all or any part of a member’s membership interest other than as provided by the operating agreement. Paragraph 10(C) of the operating agreement stated that, notwithstanding Paragraph 10(B), a member may transfer any portion of the member’s interest at any time to other members or the spouse, children, or other descendants of the member. The court prefaced its discussion of the specific dispute in this case with a discussion of the background of the Virginia Limited Liability Company Act and the nature of an LLC and explained how the treatment of a membership interest in an LLC is similar to that of a partnership interest, i.e., the interest is divided into a control interest that may not be unilaterally transferred and a financial interest that is assignable. Janet argued that she inherited Dewey’s membership by operation of his will because Paragraph 2 of the operating agreement permitted her to inherit it. However, the court stated that Paragraph 2 merely prohibited a member from transferring any part of his membership except where specifically allowed under the terms of the agreement, with consent of all other members, or upon death, intestacy, devise, or otherwise by operation of law. The court stated that the provision did not address statutory dissociation and did not specifically state an intent to supersede the provision of the statute making death a dissociation except as otherwise provided by the operating agreement. Thus, the court concluded that Dewey was dissociated from the LLC upon his death, and Janet became a mere assignee entitled only to his financial interest. The court went on to opine that it is not possible for a member to unilaterally alienate his control interest even if the operating agreement purports to allow it. The court stated that the words “unless otherwise provided in the articles of organization or an operating agreement” make it possible for an LLC to restrict assignment of members’ financial interests because they modify the remainder of the sentence in the statute, which states that a membership interest is assignable in whole or in part. According to the court, the proviso does not make it possible for an LLC to allow a member to assign his control interest because the proviso does not modify the separate sentence stating that an assignment does not entitle an assignee to participate in the management and affairs of the LLC or to become or exercise any rights of a member. Additionally, the statute provides that an operating agreement may not contain provisions inconsistent with Virginia laws. Thus, the court concluded that it was not within Dewey’s power under the agreement to unilaterally convey to Janet his control interest and make her a member because the agreement could not confer on him that power.

Executive Center III, LLC v. Meieran

823 F.Supp.2d 883 (E.D. Wisc. 2011)

The plaintiff, a judgment creditor of an LLC, sued former members of the LLC, alleging that the payment of $400,000 by the LLC to the members to liquidate their 12.5% interest in the LLC (pursuant to the terms of the LLC’s agreement entered into with the members when they invested in preferred interests in the LLC) was a fraudulent transfer, that the defendants breached a fiduciary duty owed to plaintiff, and that the payment was an inequitable preference. The plaintiff asserted fraudulent transfer claims under three provisions of the Wisconsin Uniform Fraudulent Transfer Act. Although the payment to the defendants was a transfer that resulted in the LLC’s insolvency, the court granted summary judgment in favor of the defendants on all three claims. One of the plaintiff’s fraudulent transfer claims was time-barred. The other two claims failed because the court concluded that the transfer was made for reasonably equivalent value. Under the terms of the agreement entered into between the LLC and the defendants at the time of their investment, the defendants paid $250,000 for a 12.5% interest in the LLC, and the LLC was required to make payments in certain amounts to redeem the defendants’ interest by March 1, 2008. Penalties applied if that deadline was not met. The LLC defaulted under this agreement and owed the defendants $435,000 as of August 31, 2008. The LLC agreed to pay the investors $400,000 to satisfy this debt. The court concluded that the payment of $400,000 was “value” because it satisfied an antecedent debt (the debt being the result of a fixed and mature “claim”), and the value was “reasonably equivalent” because the $400,000 was paid in exchange for forgiveness of a claim in the amount of $435,000. The plaintiff argued that the purpose of the $400,000 payment was solely to redeem the defendants’ interest and did not satisfy a debt, but the court stated that the fact that the agreement between the LLC and the investors called for a redemption did not mean that the right to $400,000 was something other than a “claim.” (The plaintiff apparently did not assert any claim based on the argument that the payment was a wrongful distribution in violation of the Wisconsin LLC statutory limitations on distributions to members when an LLC is insolvent.) The plaintiffs fared better on their breach of fiduciary duty argument. The defendants argued that they were entitled to summary judgment on this claim because common law fiduciary duties do not apply to Wisconsin LLCs. The court concluded that common law fiduciary duties apply to Wisconsin LLCs and that there were genuine issues of material fact precluding summary judgment on this claim. The court discussed the Wisconsin Supreme Court’s opinion in Gottsacker v. Monier and rejected the defendants’ argument that the case held that common law fiduciary duties do not apply to Wisconsin LLCs. The court noted that while Gottsacker did not expressly state that common law fiduciary duties relating to partnerships and corporations should apply to LLCs, the opinion also did not state that those duties would not apply. The court noted that one concurring justice in Gottsacker stated that common law concepts such as fiduciary duties are replaced by statutory obligations in the LLC context, but the court did not believe this statement prevents application of all common law fiduciary duties to LLCs because the statement was only made in a concurrence, and the statement only related to duties internally between members. The concurrence did not state that fiduciary duties to third parties have been abrogated by statute. In the absence of other Wisconsin case law delving deeper into common law fiduciary duties of LLCs and given the “growing consensus” across the country that common law fiduciary duties should apply to the operations of LLCs, the court concluded that common law fiduciary duties apply to LLCs. Thus, the court held that the defendants owed a common law fiduciary duty to the plaintiff if the LLC was insolvent and had ceased to act as a going concern. It was undisputed that the LLC was insolvent, but there was an issue of fact as to whether the LLC was a going concern when the payment to the defendants was made. The court thus denied the defendants’ motion for summary judgment on the plaintiff’s breach of fiduciary duty claim. The plaintiff’s inequitable preference argument failed because there was no Wisconsin case law recognizing inequitable preference claims. The court noted that Wisconsin courts had not raised the issue of inequitable preference in over 100 years, and the plaintiff could point to no trend in other jurisdictions recognizing inequitable preference claims in similar cases.

Ledford v. Peeples

657 F.3d 1222 (11th Cir. (Ga.) 2011)

(analysis of reliance causation element of Rule 10b-5 securities fraud claim arising from buyout of member’s LLC interest by other members; discussion of effect of operating agreement provision prohibiting pledge of membership interest; analysis of whether conduct of LLC president and LLC members violated statutory duty to act in manner believed in good faith to be in LLC’s best interest).

Zazzali v. Wavetronix, LLC

No. 10-55963, 2011 WL 5190527 (Bankr. D. Del. Oct. 31, 2011)

(analysis of gross negligence duty of care standard in operating agreement as eliminating duty of care contrary to Idaho Revised Uniform Limited Liability Company Act).

In re American Home Mortgage Holding (American Home Mortgage Corp. v. Showcase of Agents, L.L.C.)

458 B.R. 161 (Bankr. D. Del. 2011)

(personal liability of LLC president for participation in conversion of funds wrongfully transferred to LLC’s account).

Razin v. A Milestone, LLC

67 So.3d 391 (Fla. App. 2011)

(interpretation of operating agreement regarding authority of manager to retain counsel for LLC notwithstanding manager’s conflict of interest and conclusion that provision did not eliminate duty of loyalty in violation of LLC statute; analysis of manager’s retention of counsel as not violating duty of loyalty; analysis of compliance with quorum and notice requirements imposed by operating agreement for managers’ meeting).

Fiederlein v. Boutselis

952 N.E.2d 847 (Ind. App. 2011)

(absence of meeting of minds between members of radiology LLC with respect to proposal to promote member to Class C member; no personal liability of members for exercising authority to grant or deny promotion in membership status because members were acting as agents within scope of their authority; analysis of propriety of capital account refund and profit distributions).

In re Blixseth (Blixseth v. Blixseth)

459 B.R. 444 (Bankr. D. Mont. 2011)

(members’ lack of standing to assert claim that debtor/fellow member pledged LLC asset for debtor’s personal benefit; members failure to comply with requirements to assert claim derivatively; analysis of fiduciary duties of members of Montana LLC; analysis of member’s conduct pursuant to authorization obtained in accordance with operating agreement as not breaching fiduciary duty and not giving rise to damages).

Garcia v. Garcia

No. 24618/10, 2011 Wl 6380761 (N.Y. Sup. Dec. 6, 2011)

(interpretation of operating agreement provisions providing that member dissociates upon withdrawal, retirement, or expulsion but providing no procedures for such; analysis of evidence of alleged withdrawal and retirement of member).

21st Century Diamond, LLC v. Allfield Trading, LLC

88 A.D.3d 558, 931 N.Y.S.2d 50 (App. Div.1st Dept. 2011)

(sufficiency of allegations of minority member’s claim for breach of fiduciary duty, breach of covenant of good faith and fair dealing, and oppression; interpretation of operating agreement of Delaware LLC regarding action by written consent in lieu of meeting and vote required for commencement of action and removal of manager).

Sealy v. Clifton LLC

933 N.Y.S.2d 805 (Surr. Ct. 2011)

(interpretation and application of operating agreement provision regarding death of member and dissolution of LLC; requirements for judicial dissolution of LLC as contrasted to corporation and absence of oppression-based cause of action for judicial dissolution of LLC).

In re McKenzie

No. 08-16378, 2011 WL 6140516 (Bankr. E.D. Tenn. Dec. 9, 2011)

(analysis of attachment of security interests to debtor’s LLC membership interests, including issues as to transfer restrictions, extent of membership rights that can be conveyed, and effect of UCC § 9-408; defensive use of trustee’s avoidance powers and status as hypothetical lien creditor).