September 2007 — Issue 19

NAMA Holdings, LLC v. World Market Center Venture, LLC

C.A. No. 2756-VCL, 2007 WL 2088851 (Del. Ch. July 20, 2007).

NAMA Holdings, LLC (NAMA), an indirect owner of a Delaware LLC, brought an action to inspect the LLC’s books and records pursuant to provisions in the LLC’s operating agreement. NAMA argued that the operating agreement granted NAMA an unrestricted right of access to sensitive and proprietary information, but the LLC sought to limit the classes of documents available to NAMA and to require NAMA to execute a confidentiality agreement before granting access. The court concluded that, under the terms of the operating agreement, the managing members retained substantial discretion to determine the scope of access to information. Under the operating agreement, NAMA (as an explicit third party beneficiary) was entitled to “reasonable access at reasonable times” to books and records that the agreement required the managing members to maintain. The court stressed the freedom of contract enjoyed under the Delaware LLC statute and characterized NAMA’s argument that the contractual inspection provision should be construed to mirror the statutory inspection provision as a “non-starter.” The court stated that the statute might be a useful referent to resolve ambiguity, but the statute should not be used to overshadow the express contractual agreement reached by the parties in this case. The court explained that inclusion of the term “reasonable” to describe the scope of NAMA’s access was inconsistent with NAMA’s argument that it had an unconditional right of access. The court stated that the reasonableness limitation on the right of access indicated the parties contemplated someone making a judgment call as to exactly what would constitute “reasonable access.” The court noted that the operating agreement vested the managing members with typical management authority, and the court concluded that the managing members had the power to determine what constitutes “reasonable access” in the absence of explicit language in the inspection provision vesting someone other than the managing members with such right. The court found that the LLC’s limitation of the scope of NAMA’s inspection to non-sensitive information, prohibition on photocopying of the LLC’s books and records, and insistence upon execution of a confidentiality agreement were all reasonable limitations under the circumstances. The court concluded, however, that it was not reasonable to require NAMA to conduct its inspection through a specified individual alone rather than another duly authorized representative of NAMA. The court agreed with NAMA that a party with an inspection right must be able to enlist the sophisticated help of attorneys, accountants, and other experts in meaningfully evaluating complex information if the inspection right is to have any substantive force.

DeNike v. Cupo

394 N.J.Super. 357, 926 A.2d 869 (N.J. Super. A.D. 2007).

The court addressed numerous issues, including the proper valuation date and the meaning of “fair value,” in connection with an action for the dissociation and buy out of an LLC member. Relations between the two members of a New Jersey LLC became strained, and they decided to go their separate ways but could not agree on the terms of a buy out. The members, DeNike and Cupo, mediated their dispute but did not reach an agreement. After the mediation failed, DeNike filed a complaint seeking to terminate Cupo’s membership and to acquire his interest. After the trial court entered an order deeming Cupo dissociated and entitled to compensation for his interest, Cupo filed a counterclaim for the fair value of his interest, an accounting, and repayment of certain amounts paid to DeNike. The trial court granted a motion by DeNike to establish the valuation date for Cupo’s interest as December 31, 2002, which was the date the parties had adopted as a valuation date in the unsuccessful mediation. Cupo argued that the valuation date should be seven months later on the date the court deemed him dissociated from the LLC. The trial court heard evidence from the members, the LLC’s accountant, and valuation experts of each of the members, and the court issued an initial decision. In the initial decision, the trial judge made findings with respect to a number of issues but concluded that the opinions of both parties’ experts were flawed. The trial court appointed its own expert and accepted that expert’s calculations and opinions. The trial court agreed with the court-appointed expert that Cupo’s interest should not be modified by a marketability or minority discount. The court of appeals addressed a number of challenges to the judgment by Cupo. The court of appeals agreed with Cupo that the trial court erred in specifying December 31, 2002 as the valuation date rather than the later date on which the court deemed Cupo dissociated. The court pointed out the distinction between the language used in the oppressed shareholder statute (which permits a court-ordered sale of a shareholder’s stock as valued at the date of commencement of the action or such earlier or later date deemed equitable by the court) and the New Jersey LLC statute. The court examined the provisions of the LLC statute regarding dissociation and noted that the New Jersey LLC statute does not specify how a valuation date is determined for purposes of purchasing a dissociated member’s interest other than in the case of a member’s resignation. The court concluded, however, that the legislature intended for a dissociated member’s interest to be valued in the same manner as that specified for a resigning member. The New Jersey statute specifies that a resigning member is entitled to the fair value of his or her interest as of the date of resignation and does not give the court discretion to determine another valuation date. Thus, the court of appeals concluded that the trial court erred in using the date established by the parties for purposes of the failed mediation rather than the date on which the trial court deemed Cupo dissociated. The court of appeals next addressed Cupo’s argument that the trial court erred in determining the fair value of his interest. The court applied an abuse of discretion test to the trial court’s acceptance of the expert’s methodology and opinion as to valuation but noted that the question of standards of value was subject to de novo review. The court of appeals distinguished the terms “fair market value” and “fair value” and concluded that the trial court’s expert applied the proper valuation standard in recognizing that Cupo’s interest was not readily marketable and would not give a third party a controlling interest. The court stated that the traditional “fair market value” test (which assumes a willing buyer and willing seller) did not apply because Cupo’s interest had little value to outsiders but significant intrinsic value to DeNike, who wanted to continue the business. The court of appeals concluded that the trial court did not abuse its discretion in relying on the expert’s calculations and conclusions regarding value. The court of appeals also gave deference to the trial court’s action in equalizing the members’ capital accounts based on an alleged agreement to “true up” their contributions to the business. The court reviewed the testimony on this disputed matter and concluded that there was credible evidence to support the trial court’s decision. Further, the court of appeals concluded that the trial court acted within its discretion in implicitly finding that there was no manifest injustice in denying prejudgment interest. Finally, the court of appeals rejected Cupo’s argument that the trial court erred in failing to enter the final judgment against DeNike and in permitting the judgment to be paid over time. The trial court’s rationale was that the operating agreement manifested an intent to allow the LLC to continue as a viable enterprise, and the trial court believed the buy out obligation was that of the LLC and not the remaining member even though he became the only member of the LLC. The court of appeals pointed out that the complaint was filed by DeNike individually and on behalf of the LLC, and that the operating agreement provided that a distribution, payable in a lump sum or by a five-year installment promissory note, was to be made when a member’s interest was terminated. The court of appeals concluded that the trial court’s order thus enforced the parties’ agreement.

FirstMerit Bank, N.A. v. Washington Square Enterprises

No. 88798, 2007 WL 2206545 (Ohio App. Aug. 2, 2007).

The judgment creditor of a member of an LLC obtained an order appointing a receiver of the LLC’s property. The order authorized the receiver to possess, manage, control, and protect the property and business of the LLC. The judgment creditor argued that the LLC was wholly owned by the judgment debtor and that its assets could thus be applied to satisfy the judgment. The court of appeals held that the judgment creditor did not have the right to satisfy its judgment from assets of the LLC because LLCs are separate entities from their owners. Citing provisions of the Ohio LLC statute, the court pointed out that the member’s membership interest was an asset which could be charged to satisfy her judgment debt, but the membership interest did not include any direct interest in the assets of the LLC that could be used by her creditors to satisfy her debts. Rather, a judgment creditor of a member has only the rights of an assignee of a membership interest, i.e., only the right to receive distributions that would have been paid to the member-assignor. The court expressed no opinion as to whether a judgment creditor of an LLC member could seek judicial dissolution under the Ohio statute. Because the judgment creditor did not demonstrate any right to satisfy its judgment from the assets of the LLC, the trial court abused its discretion in placing the LLC and its property in receivership.

In re Tsiaoushis (Endeka Enterprises, LLC v. Meiburger)

No. 1:07cv436, Bankr. No. 05-15135 (RGM), 2007 WL 2156162 (E.D. Va. July 19, 2007).

The district court agreed with the bankruptcy court that the trustee of a debtor member of a District of Columbia LLC was entitled to a partial summary judgment declaring enforceable the provisions of the LLC operating agreement requiring dissolution and winding up as a result of the debtor’s bankruptcy filing. The court rejected the argument that members of small LLCs owe fiduciary duties to their LLCs as a matter of course and that all LLC operating agreements are, therefore, executory contracts subject to Section 365(e) of the Bankruptcy Code. The court found no per se rule governing the issue. Assuming arguendo that the existence of a fiduciary duty alone constitutes a continuing obligation, the court concluded that the LLC and its non-debtor member failed to establish that D.C. law recognizes fiduciary duties between members of a manager-managed LLC. Based on a particularized evaluation of the LLC’s operating agreement, the court concluded that it was not an executory contract because it did not create any material, continuing obligation of the debtor member. The court noted that the debtor was not a manager or director of the LLC and had no duties as such when he filed for bankruptcy. Further, the operating agreement provided that members of the LLC could engage in other activities without incurring any obligation to offer any interest in the activities to the LLC or its members. Finally, the D.C. LLC statute does not contain any express provisions imposing fiduciary duties on mere members.

Noble v. A & R Environmental Services, LLC

__ P.3d __, 2007 WL 2243098, No. 24980-8-III (Wash. App. 2007).

The trial court’s equal division of a Washington LLC’s assets between the LLC’s two members in a judicial dissolution action was reversed and remanded due to the trial court’s failure to make findings from which the court of appeals could determine that the statutory dissolution procedures were followed. The trial court found that the parties intended to be equal members, and the court valued their contributions equally without respect to their actual value. The trial court made no findings regarding the value of any of the assets, nor did it make any findings regarding creditors. The court of appeals reversed and remanded for further findings because it was impossible to determine if the distribution of assets complied with the dissolution provisions of the Washington LLC statute. The court pointed out that the Washington LLC statute defines an operating agreement as a written agreement; therefore, the statutory default provisions regarding distribution of the assets applied regardless of the subjective intent of the members regarding their ownership interests. Because the statute requires that assets first be distributed to pay the claims of creditors, the trial court erred in making no findings regarding creditors. Further, the court of appeals concluded that the trial court was required to make findings as to who contributed what to the LLC because the statute requires a return of capital contributions prior to distributions in proportion to which members share distributions. Finally, the court of appeals addressed a judgment which one of the members obtained against the other on behalf of the LLC for loss of a business opportunity. The trial court had deemed the judgment satisfied in order to equalize the distribution of the LLC’s assets. The court of appeals stated that the judgment was not an asset of the LLC that was subject to distribution and that the trial court could consider whether the member who obtained the judgment became a creditor.

Woodman Investment Group, LLC v. Superior Court

No. B188553, 2007 WL 2084053 (Cal. App. 2 Dist. July 23, 2007).

Sufficiency of evidence to support trial court’s finding that sole member of single purpose LLC was LLC’s alter ego.

Weber v. U.S. Sterling Securities, Inc.

282 Conn. 722, 924 A.2d 816, No. 17623 (Conn. 2007).

Application of Delaware law to issue of liability of members of Delaware LLC and analysis of potential personal liability of members for their own conduct violating federal Telephone Consumer Protection Act.

Christ v. Cormick

C.A. No. 06-275-GMS, 2007 WL 2022053 (D. Del. 2007).

Analysis and application of Delaware statute regarding personal jurisdiction over manager of Delaware LLC.

Kattula v. Stout

No. 5:06CV-181-M, 2007 WL 2155690 (W.D. Ky. July 25, 2007).

Standing of foreign LLC to sue after obtaining new certificate of authority following revocation of prior certificate of authority.

Smith v. Shining Rock Golf Community, LLC

No. 20061510B, 2007 WL 2110958 (Mass. Super. June 20, 2007).

Insufficiency of allegations to support piercing veil of single member LLC.

Levine v. O’Dorisio

No. 266166, 2007 WL 2120548 (Mich. App. July 24, 2007).

Analysis of error in division of assets of professional LLC upon dissolution where trial court failed to follow terms of operating agreement.

Rimawi v. Atkins

__ N.Y.S.2d __, 2007 WL 2050834 (N.Y. A.D. 3 Dept. 2007).

Derivative nature of member’s claim against co-member and court’s ability to hear derivative claim governed by Delaware law; New York court’s lack of jurisdiction over cause of action for judicial dissolution and ancillary accounting of Delaware LLC.

Ritchie Capital Management, L.L.C. v. Coventry First LLC

No. 07 Civ. 3494(DLC), 2007 WL 2044656 (S.D. N.Y. July 17, 2007).

Application of internal affairs doctrine and Delaware law in determining sufficiency of veil piercing allegations regarding Delaware LLC.

In re The 1031 Tax Group, LLC

No. 07-11448(MG), 2007 WL 2085384 (S.D. N.Y. July 17, 2007).

Discussion of Delaware LLC statute regarding member’s ability to structure management of LLC by manager, analysis of debtors’ request for approval of consulting agreement for management of debtor LLCs.

National Union Fire Insurance Company of Pittsburgh v. Wuerth

No. C-2-03-0160, 2007 WL 2071911 (S.D. Ohio July 17, 2007).

LLC’s inability to commit malpractice other than vicariously through agent lawyers; bar against LLC’s vicarious liability where negligence claims against individual lawyers barred by statute of limitations.