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Stewart v. Bureaus Investment Group #1, LLC
__ F.Supp.2d __, 2014 WL 2462883 (M.D. Ala. 2014)
The plaintiff, on behalf of herself and other potential class members, sued a non-existent LLC, related existent and non-existent entities, and several individuals, for violation of the Federal Fair Debt Collection Practices Act and state law torts. The court discussed the alter ego doctrine as it related to the plaintiff's standing to sue the various entities. The plaintiff alleged that she had standing to sue all the entities because they were all alter egos of one of the individual defendants. The court stated that Alabama law allows veil piercing of an LLC but stated that the alter ego doctrine would only confer standing to sue all the entities if they were all the alter egos of the one entity that pursued the plaintiff, and they were not. The court concluded, however, that the plaintiff had standing to sue the entities under the "juridical link" theory. The court also addressed the viability of the alter ego claims as a basis to impose liability on certain defendants and concluded that the plaintiff's allegations were sufficient to avoid dismissal of the veil-piercing claims. In addition, assuming the plaintiff amended her complaint to provide more detail about the alleged fraudulent acts or omissions of individual defendants who allegedly committed or participated in FDCPA violations and state law torts as "central figures," the court concluded that personal liability of these defendants was plausible on this basis.
Touch of Italy Salumeria & Pasticceria, LLC v. Bascio
Civil Action No. 8602-VCG, 2014 WL 108895 (Del. Ch. Jan. 13, 2014)
Four individuals formed an LLC to operate an Italian grocery. A couple years later, two of the original members left, and an additional member was admitted. The three members executed an amended and restated LLC agreement. Although the business operated successfully and profitably after that, one of the original members eventually decided to withdraw from the LLC and gave notice pursuant to the LLC agreement, which permitted any member to withdraw by giving written notice to the other members. The withdrawing member told the remaining members that he intended to move to Pennsylvania and possibly start a new business there, but he and his brother opened a competing Italian grocery on the same block as the LLC's store ten weeks after he withdrew. The LLC and the two remaining members sued the withdrawing member and his brother (who was one of the original members that had withdrawn a couple years earlier), and the defendants filed a motion to dismiss. With respect to the plaintiffs' breach of contract claim, the court concluded that the LLC agreement provided a mechanism for voluntary withdrawal and did not contain a non-compete provision. Furthermore, the plaintiffs did not refer to any specific provision of the LLC agreement in support of their allegation that the withdrawing member breached the agreement. The plaintiffs appeared to argue that one of the original members was entitled to the return of his capital contribution under the LLC agreement, but the member was not yet entitled to the return of his contribution under the terms of the agreement and his claim would be against the LLC rather than the current or former members in any event. Thus, the court dismissed the breach of contract claim. The court also dismissed the plaintiffs' claims of fraud and misrepresentation because the plaintiffs did not adequately plead any reliance on the withdrawing member's representations to their detriment. The court next addressed the plaintiffs' allegation that the withdrawing member breached the implied covenant of good faith and faith dealing. The implied covenant prevents a party from denying his or her contractual partners the benefit of their bargain based on circumstances that the parties did not anticipate, but withdrawal of a member was specifically anticipated by the parties inasmuch as the parties provided in their LLC agreement for voluntary member withdrawal. Additionally, the parties did not include a covenant not to compete, a standard provision in employee contracts, in their LLC agreement. The court stated that the plaintiffs obviously regretted not including a non-compete provision, but the court refused to use the implied covenant to "shoehorn" a covenant not to compete into the parties' contract, and the court dismissed the implied covenant claim. The court also dismissed the plaintiffs' claim that the withdrawing member breached his fiduciary duty to the LLC by making arrangements to open a competing business while he was still employed by the LLC. The plaintiffs did not plead any facts supporting an inference that the withdrawing member breached his fiduciary duty by making plans or arrangements to open the competing business while he was still a member of the LLC. Further, the withdrawing member owed no duties to the LLC in the ten-week period after he left the LLC and before he opened his competing business. Finally, the court dismissed the plaintiffs' conversion claim because the plaintiffs failed to identify any specific property that the withdrawing member converted.
Fillip v. Centerstone Linen Services, LLC
C.A. No. 8712-ML, 2013 WL 6671663 (Del. Ch. Dec. 3, 2013) (Master's report), aff'd in part and remanded for further proceedings, 2014 WL 793123 (Del Ch. Feb. 27, 2014)
Both the master and the vice chancellor concluded that the LLC agreement in this case provided for mandatory advancement and noted that the case illustrates the relatively common remorse experienced by an entity that has conferred broad advancement rights to an official or employee whom the entity later accuses of grievous wrongdoing. The plaintiff in this action sought advancement for expenses in defending counterclaims and affirmative defenses asserted by the defendant LLC in an action brought by the plaintiff in Georgia to recover severance payments after the plaintiff resigned from his position as CEO of the LLC. The LLC's original counterclaims and affirmative defenses alleged various breaches of fiduciary duty and breaches of contract. In an effort to avoid advancement, the LLC dismissed its breach of fiduciary duty claims and argued that advancement was not required for the remaining breach of contract allegations. The indemnification provision of the LLC agreement provided as follows:
The Company shall indemnify, defend and hold harmless each Manager and Officer for all costs, losses, liability, and damages whatsoever paid or incurred by such Manager or Officer in the performance of his duties in such capacity, including, without limitation, reasonable attorney's fees, expert witness and court costs, to the fullest extent provided or permitted by the [Delaware Limited Liability Company Act] or other applicable laws. Further, in the event fraud or bad faith claims are asserted against such Manager or Officer, the Company shall nonetheless bear all of the aforesaid expenses subject to the obligation of such Manager or Officer to repay all such expenses if they are finally determined to have committed such fraud or bad faith acts.
The LLC argued that the plaintiff's advancement right was limited to expenses related to claims for fraud or bad faith, and in any event was not required because the breach of contract claims were personal and thus not taken "in the performance of his duties" as an officer of the LLC. Applying contract interpretation principles and reading the indemnification provision as a whole, the court held that the word "defend" in the first sentence of the indemnification provision created an advancement right. The court relied on case law holding that the word "defend" has a meaning distinct from the phrase "indemnify and hold harmless" and creates a duty to pay for expenses of defense on a current basis. The court concluded that the second sentence of the indemnification provision merely clarified the scope of the advancement rights created in the first sentence. According to the court, the LLC's position that the parties intended to limit advancement to circumstances in which an official was accused of fraud or bad faith was not a sensible interpretation of the agreement in this case. The court also rejected the LLC's argument that the phrase "in the performance of his duties in such capacity" created a narrower advancement right than the "by reason of the fact" standard found in the Delaware General Corporation Law, which is satisfied if there is a nexus or causal connection between the corporate actor's official capacity and the underlying proceedings. The court found no substantive distinction between the "performance of his duties" language used in the LLC agreement in this case and the "by reason of the fact" language in the corporate statute. The language used in the indemnification provision of the LLC agreement and the broad contractual freedom conferred under the LLC statute did not support the LLC's assertion that "in the performance of his duties in such capacity" should be read more narrowly than "by reason of the fact," both of which can be understood as encompassing wrongdoing committed by an officer in his official capacity and in the performance of his day-to-day duties. In arguing its exceptions to the master's report to the vice chancellor, the LLC conceded that the two standards are interchangeable but argued that the master's determination of the scope of advancement under either standard was incorrect. The vice chancellor found that the meaning of the phrase "in the performance of his duties" was controlled by case law explicating the "by reason of the fact" standard. The master evaluated the application of the advancement provision to the various claims asserted in the Georgia action, but the vice chancellor concluded that it would be premature to address the master's findings in this regard due to the fluid nature of the Georgia action and information lacked by the master at the time of her report. The vice chancellor thus remanded to the master for further proceedings.
Grace v. Ashbridge LLC
C.A. No. 8348-VCN, 2013 WL 6869936 (Del. Ch. Dec. 31, 2013)
The plaintiff, a member, manager, and chairman of the defendant LLC, filed this action for advancement and indemnification for expenses incurred in the current action and a previously commenced action in Pennsylvania (the "Orphans' Court Proceeding") and failed mediation arising out of alleged breaches of fiduciary duty by the plaintiff in connection with the plaintiff's role as a trustee of a family trust. The trust owned shares in a corporation that merged into the defendant LLC, and the plaintiff was also a shareholder, director, and chairman of the corporate predecessor of the LLC. The claims in the Orphan's Court Proceeding were based on various acts of mismanagement involving the corporation and an affiliate entity. The plaintiff argued in the current proceeding that he was entitled to advancement and indemnification under the LLC's operating agreement because the agreement required indemnification of losses and advancement of expenses for any person made a party to a proceeding by reason of being a member or manager of the LLC or an employee, officer, director, manager, shareholder, or partner of a member or manager of the LLC. The LLC sought to dismiss the current action because the plaintiff's acts relating to the Orphans' Court Proceeding were taken in the plaintiff's personal capacity or in his capacity as an officer of the predecessor corporation or its affiliate and not in any capacity relating to the LLC. The court analyzed the indemnification provision of the LLC operating agreement and concluded that its plain terms did not extend to predecessors or affiliates. The claims in the Orphans' Court Proceeding did not even mention the LLC, but rather were based on various acts of mismanagement related to the predecessor corporation and its affiliate. Thus, the LLC operating agreement did not require advancement and indemnification for that proceeding. The court stated that Delaware case law supported this result because successor entities are generally not liable for the actions of corporate officers of predecessor entities or affiliates when a fundamental change in identity has occurred. For purposes of advancement and indemnification, Delaware law considers a conversion from an LLC to a corporation to be a "fundamental change in identity." One of the ways in which LLCs and corporations differ is with respect to indemnification: indemnification is mandated when corporate directors and officers successfully defend themselves, but indemnification is left to the terms of the operating agreement in the case of LLCs. The indemnification rights in the LLC's operating agreement were different from those found in the predecessor corporation's bylaws, making this case similar to a previous Delaware case, Bernstein v. Tractmanager, Inc., in which the chancery court had held that a former manager of an LLC and current director of a corporation was only entitled to indemnification under the corporate bylaws, which did not retroactively create a right for the person's tenure as a member of the LLC. The court expressed no opinion on whether a successor entity could be responsible for indemnifying or granting advancement based upon the bylaws or operating agreement of a predecessor entity because the plaintiff did not allege that the predecessor corporation's bylaws entitled him to indemnification and advancement. The court also held that no indemnification was due for expenses of the failed mediation because the plaintiff failed to plead any facts describing the mediation or the factual circumstances underlying it. Finally, because the plaintiff was not entitled to indemnification and advancement for the Orphan's Court Proceeding and mediation, he was not entitled to indemnification or advancement for the current action.
Lopes v. JetSetDC, LLC
994 F.Supp.2d 135 (D.D.C. 2014)
The plaintiff relied on veil-piercing theory as a basis to hold two individual members of an LLC liable for tort claims against the LLC, and the members sought dismissal of the claims on the basis that the plaintiff did not plead facts sufficient to pierce the veil of the LLC. The court noted that there was a question as to whether the veil-piercing doctrine of the District of Columbia (where the events occurred) or Maryland (the jurisdiction in which the LLC was organized and its principal office was located) applied in this case. The court stated that the District of Columbia choice-of-law rules required the court to conduct an "interest analysis" to determine which jurisdiction's underlying policy would be most advanced by having its law applied. The court concluded that no real conflict existed between the veil-piecing doctrines of the District of Columbia and Maryland in that both doctrines are firmly grounded in equity and recognize the alter ego theory as a means to pierce the corporate veil. The court then proceeded to apply the law of the District of Columbia. The court listed several factors as to which courts generally inquire under D.C.'s veil-piercing test but stated that "the inquiry ultimately rests on whether 'the corporation is, in reality, an alter ego or business conduit of the person in control.'" The plaintiff pled that the individual members were the "'owners and operators,'" of the LLC, were "'alter egos of the corporation,'" that "'substantial ownership of corporate stock is concentrated in one person or a few persons, corporate formalities have been disregarded, and other factors support disregarding the corporate entity.'" The court characterized the facts pled by the plaintiff as "minimal" and concluded that the plaintiff had met, "albeit barely," the plaintiff's pleading burden. The court thus denied the defendants' motion to dismiss for failure to state a claim upon which relief can be granted.
Dinuro Investments, LLC v. Camacho
141 So.3d 731 (Fla. App. 2014)
The court of appeals reviewed Florida law on the question of when a member of an LLC has standing to bring a claim individually as opposed to derivatively against a fellow member and concluded that the plaintiff's claims in this case must be brought derivatively. The plaintiff alleged violations of the operating agreement of the LLC that left the LLC worthless and deprived the plaintiff of the value of his investment. In essence, the plaintiff alleged that the other two members and their individual owners intentionally allowed the LLC to default on its indebtedness so that they could purchase the loans at a discount and foreclose on the mortgaged properties, thus depriving the LLC of its sole assets.
The court characterized the question of when a particular action may be brought directly rather than derivatively as a complicated and confusing inquiry, particularly in the case of a closely held entity, and the court stated that the matter was further confounded by the lack of clarity in Florida case law. The court's review of the scholarly literature and case law around the country revealed three approaches to determining whether an action may be brought directly or derivatively: (1) the "direct harm" test; (2) the "special injury" test; and (3) the "duty owed" test. The court stated that a majority of courts around the country appear to apply the "direct harm" test, under which the harm is examined to see if it flows first to the company and only damages the owners due to the loss in value of their ownership interests or whether the harm flows directly to the owner in a way that is not secondary to the company's loss. The court characterized this approach as likely the simplest approach but noted that it may be especially harsh in small company settings. The "special injury" test requires the court to determine whether the plaintiff's injury is distinct from that of other owners. The court noted that this test provides more flexibility but can be difficult to apply because the "special" nature of the injury can be a nebulous inquiry. The "duty owed" test examines the statutory and contractual terms to determine whether the duty at issue is owed to the individual owner or whether the duty is owed to the company generally. This approach allows for the greatest freedom of contract, but the court noted that many operating agreements and statutes do not specify who owes a particular duty and to whom the duty is owed. For example, the court pointed out that the Florida LLC statute states that all managing members owe a duty of loyalty and care to the LLC and all the members of the LLC. Thus, the court said that the "duty owed" test may provide little guidance or can be interpreted to allow either a direct or derivative suit.
The court reviewed Florida case law and attempted to synthesize 50 years of case law in the courts of appeals in the absence of an established rule by the Florida Supreme Court. The court characterized the case law as "opaque," "varying," and "divergent" and concluded that the only way to reconcile the case law was to hold that an action may be brought directly only if both the direct harm and special injury tests are met, i.e., only if (1) there is a direct harm to the shareholder or member such that the alleged injury does not flow subsequently from an initial injury to the company, and (2) there is a special injury to the shareholder or member that is separate and distinct from those sustained by the other shareholders or members. However, the court also concluded that there was an exception to this rule under Florida law so that a member or shareholder need not satisfy this two-pong test if there is a separate statutory or contractual duty owed by the defendant to the plaintiff.
Applying Florida law to the facts of this case, the court concluded that the plaintiff did not allege a direct harm and thus did not satisfy the two-prong test. The plaintiff sought to establish that the separate duty exception was met based on the operating agreement. The court noted that an operating agreement is a more complicated and nuanced set of contractual rights and duties than a typical bilateral contract. The LLC statute provides that the operating agreement governs the relations among the members, managers, and company, and the precise terms of the agreement are important in determining whether an individual member owes the other members any duties or merely owes the company duties. The operating agreement in this case contained a provision outlining certain conduct that constitutes a default under the agreement and the effects of a default. The agreement specified certain remedies for a member's default and also provided that the members and company could elect to pursue remedies provided under the agreement "or any other remedies available at law or in equity." The plaintiff argued that this language provided for a direct action by a member against another member for breach of the agreement. The court disagreed. The specific remedies provided by the agreement were termination of a defaulting member's interest and a preemptive right to buy out the member's interest. The court said that the ability to pursue other remedies simply allowed pursuit of additional remedies consistent with Florida statutory and common law but did not expand the member's rights beyond the rights currently available under Florida law. The court found it significant that a provision stating that members are directly liable to one another was conspicuously missing from the operating agreement. According to the court, the statutory limitation on a member's liability for involvement with the LLC precluded a member from suing another member directly for breach of the agreement.
In sum, Florida law does not permit an LLC member to sue individually for damages arising out of its status as a member unless (1) the damages arise from a direct harm and special injury, or (2) there is a separate duty owed by the defendant to the plaintiff. The plaintiff did not satisfy either of these tests. Thus, the remedy available to the plaintiff was a derivative suit, which the plaintiff did not bring, and the trial court did not err by dismissing the plaintiff's complaint.
Wandering Trails, LLC v. Big Bite Excavation, Inc.
329 P.3d 368 (Idaho 2014)
The plaintiffs sought to pierce the veil of an LLC and hold its two individual members liable for the LLC's failure to perform a contract. The court discussed the application of the corporate alter-ego doctrine to LLCs and held that the plaintiffs' veil-piercing claim failed because the plaintiffs did not raise a genuine issue of material fact demonstrating the unity of interest required to establish alter ego. The court noted that factors considered in corporate veil piercing include the level of control the shareholder exercises over the corporation, the lack of corporate formalities, the failure to operate corporations separately, whether separate books are kept, and the decision-making process of the entity. The court pointed out that the Idaho LLC statute specifically provides that the failure of an LLC to observe particular formalities related to exercise of the LLC's powers or management activities is not a ground for imposing liability on members or managers for the liabilities of the LLC. Thus, the court stated that the validity of its holdings with respect to corporate veil piercing were questionable in the LLC context. The court also stated that the exercise of full control by owners of a corporation is a relevant inquiry but that such an inquiry in the LLC context would be contrary to express statutory provisions permitting "individual LLCs and member-managed LLCs" and providing that LLCs are entities distinct from their members. The plaintiffs argued that the LLC's bank account was not formal enough, that decisions were not made by resolutions, and that the LLC was capitalized by capital calls. The court stated that these facts did not demonstrate unity of interest because the lack of such corporate formalities is not fatal to an LLC's status, and there is no requirement that an LLC make decisions by resolution or be capitalized other than by capital calls. Further, there was evidence that demonstrated a distinction between the LLC and its members in the form of checks in the LLC's name, the absence of any evidence of deposits of the members' own money into the LLC bank account other than capital contributions, and the absence of evidence of payment of the member's obligations with LLC funds. The members also recognized the distinction between themselves and their LLC when they requested that the LLC be named in an assignment agreement that was executed in connection with the LLC's contract with the plaintiff. Although the members issued a check from the LLC's account for legal services rendered to another entity owned by the members, the other entity later reimbursed the LLC for this expense, and the court characterized this as an oversight that was a reasonable mistake amounting to no more than a scintilla of evidence of unity of interest.
Trinity Industries Leasing Company v. Midwest Gas Storage, Inc.
__ F.Supp.2d __, 2014 WL 1245071 (N.D. Ill. 2014)
The plaintiff obtained a default judgment in Texas state court for breach of contract against a Delaware LLC headquartered in Illinois. In this case, the plaintiff sued the judgment debtor LLC's president and CEO, O'Malley, alleging that O'Malley schemed to defraud the plaintiff by causing the LLC to lease railcars from the plaintiff and sublease those railcars to other companies and then funneling the payments from the other companies to himself and other entities under his control. The plaintiff claimed that O'Malley misrepresented the financial condition of the LLC when it entered into the lease with the plaintiff and that the LLC was in the process of selling its business at that time. In this case, the plaintiff asserted claims based on fraud, veil piercing, and fraudulent transfer.
The parties agreed that Texas law applied to the plaintiff's fraud claim, and the court held, under Indiana choice-of-law rules, that Texas law applied to the extent that the plaintiff's fraud claim rested on breach of fiduciary duty as well. The court rejected the plaintiff's argument that Delaware law governed the question of whether O'Malley owed the plaintiff a duty under the trust fund doctrine because Indiana choice-of-law rules do not permit different issues within the same claim to be governed by different laws. The plaintiff did not rely on the trust fund doctrine as a separate basis of recovery but sought to extrapolate a fiduciary duty to creditors pursuant to the trust fund doctrine. The court noted that Texas had slowly abrogated the trust fund doctrine by the enactment of remedial statutes, and the parties disputed whether the doctrine remained viable in Texas. Although the court recognized that Indiana choice-of-law rules required the application of Texas law to each element of the plaintiff's fraud claims, the court also stated that whether the trust fund doctrine imposes a fiduciary duty on directors and officers of a corporation or LLC is a matter of internal affairs governed by the law of the state of formation under Indiana corporate and LLC choice-of-law laws. While the scope of the trust fund doctrine was uncertain in Texas, it has clearly been rejected in the LLC context in Delaware so that creditors of a Delaware LLC have no claim for breach of fiduciary duty under the trust fund doctrine. Because the judgment debtor LLC was a Delaware LLC, the court stated that the plaintiff could not rely on the trust fund doctrine to establish that O'Malley owed the plaintiff a fiduciary duty.
Because the judgment debtor LLC was organized in Delaware, the parties agreed that Delaware law controlled the plaintiff's alter-ego claim against O'Malley. The court stated that the same rules that apply to corporate veil piercing apply to LLCs under Delaware law, and the court held that the plaintiff pled facts sufficient to state a claim to disregard the LLC's organizational structure and hold O'Malley liable under an alter ego theory. The court stated that the plaintiff need not plead that the corporate form itself was a fraud but need only plead an injustice in the use of the corporate form. The plaintiff alleged that O'Malley used the LLC's organizational form to perpetrate a scheme to defraud by leasing railcars on behalf of the LLC, subleasing them to a third party, and keeping the proceeds. The court stated that the plaintiff also alleged facts to support the factors relevant to piercing the veil. In addition to facts regarding the LLC's undercapitalization and insolvency, the court pointed out that the plaintiff pled the following facts showing a failure to observe corporate formalities: the LLC did not maintain accurate financial records, including an account of members' capital contributions; the LLC failed to properly file tax returns or declare dividends; the board of directors failed to approve the lease; and the defendants had no meeting minutes or articles of organization for the LLC. The plaintiff also alleged that O'Malley diverted the sublease proceeds from the LLC to other entities in which he had an interest and that these transactions were not properly documented or approved by the LLC's board of directors. The plaintiff alleged that O'Malley dominated and controlled the LLC and related entities and used his control to intermingle the cash, employees, and assets of these entities. The court concluded that the allegations of a scheme to defraud the plaintiff and factors evidencing the misuse of the LLC's form stated a claim for veil piercing under an alter-ego theory.
The parties agreed that Texas law applied to the plaintiff's fraudulent transfer claims, but the plaintiff claimed that Indiana's statute of limitations for fraudulent transfers should apply because Indiana's procedural law applied to the lawsuit. The defendants argued that the Texas Uniform Fraudulent Transfer Act (TUFTA) contains a statute of repose, not limitations, and that this statute of repose applied to the plaintiff's claims. The court agreed with the defendants that the TUFTA statute of repose applied, but the court concluded that Texas law recognizes an exception to the statute of repose for discovery and that the plaintiff's claims were sufficient to trigger that exception. The court concluded that the plaintiff stated a claim for fraudulent transfer against O'Malley and two related entities based on numerous alleged transfers from the LLC with actual intent to defraud the plaintiff before or within a reasonable time after the lease with the plaintiff was entered into. The court also concluded that the plaintiff stated a claim for transfers made by the LLC after the lease without receiving consideration and while the LLC was insolvent. The court concluded that the plaintiff failed to state a claim against Mrs. O'Malley for fraudulent transfer. The plaintiff did not allege that Mrs. O'Malley received any fraudulent transfer from the LLC or its subsequent transferees. The plaintiff alleged that Mrs. O'Malley received from her husband a membership interest in an LLC that received transfers from the judgment debtor LLC. The plaintiff argued that the TUFTA's definition of transferee is broad enough to include marital property transfers, but the court stated that the plaintiff did not allege that O'Malley used any funds from the judgment debtor LLC to purchase his interest in the other LLC, and the subsequent transfer of the interest in the other LLC to Mrs. O'Malley thus was not actionable as a transfer under TUFTA. The only transfer alleged between the O'Malley's was not related to the alleged fraudulent transfers made by the judgment debtor LLC.
Pannell v. Shannon
425 S.W.3d 58 (Ky. 2014)
The sole member of an LLC executed a lease identifying the LLC as the tenant. At the time the lease was signed, the LLC had been administratively dissolved, but the LLC was subsequently reinstated. The lessor argued that the member was personally liable on the lease based on the manner in which she signed the lease and because the LLC was not in existence at the time of the lease. The court concluded that the lease unambiguously indicated that the member signed the lease in her representative capacity on behalf of the LLC and that the retroactive effect of the reinstatement of the LLC under Kentucky law precluded the member from being liable as a member or under agency principles for actions taken on behalf of the LLC while the LLC was administratively dissolved.
Pannell, the owner of the property, first argued that Shannon, the sole member of Elegant Interiors, LLC, was personally liable based on the manner in which Shannon signed the lease. The lease stated on its cover page that it was "for Ann Shannon," but the lease defined the "Tenant" as Elegant Interiors, LLC, and referred to the "Tenant" as the party to the lease throughout the lease. The court stated that the cover page was introductory and was not an essential part of the operative terms of the lease. Although Shannon did not include her title or otherwise indicate her representative capacity along with her signature, her signature line was preceded by the word "By," which indicated she was signing in a representative capacity. The court stated that the failure of an officer to add the title of the office is not fatal, although it is the better practice to include the title. The court saw no reason to depart from the rule that an officer or agent has not signed in an individual capacity and is not personally liable on a contract if the body of the contract states it is with a corporation or other entity. The court concluded that the reference to the member on the cover page and failure to specify her representative capacity did not create an ambiguity in the lease. The court also rejected the argument that a release of a prior lease between the LLC and Pannell created an ambiguity by referring to Ann Shannon as the bound party. The parties to the first lease were the LLC and Pannell, and that lease had a no-oral-modification clause. The court stated that the release was entered into because of that provision and could not be read in a vacuum to be an independent agreement personally obligating Shannon. The court stated that the release and second lease must be read in light of the statutory preference for liability protection of LLC members. Further, the court relied on the integration clause in the second lease to conclude that the second lease controlled over the release with regard to who was bound under the lease.
The court next considered the effect of the administrative dissolution and subsequent reinstatement of the LLC with regard to Shannon's statutory protection from liability as a member of the LLC. The court concluded that a member of an LLC is protected by the Kentucky LLC statute from liability for actions taken during a period of administrative dissolution so long as the LLC is reinstated before a final judgment is rendered against the member. The court analyzed the relevant statutory provisions at length and concluded that the relation-back language in the statute and the cancellation of the certificate of dissolution by the secretary of state in a reinstatement result in a retroactive undoing of the dissolution as if the administrative dissolution never took place.
The court next addressed the effect of the administrative dissolution and subsequent reinstatement of the LLC with regard to Shannon's potential liability based on agency principles. This analysis involved two sub-questions. First, could Shannon be personally liable merely by reason of being an agent of a dissolved LLC? Second, could Shannon be personally liable as an agent who acted without authority? With respect to the first question, the court noted that the statutory protection from liability for the debts, obligations, and liabilities of an LLC extends to managers and agents as well as LLC members. Thus, the analysis above as to why a member of an administratively dissolved LLC is protected from liability by the retroactive effect of reinstatement would also apply to the extent liability was predicated solely on Shannon's status as a manager or agent. The court went on to address Pannell's argument that Kentucky should follow the majority rule that reinstatement of a corporation does not shield officers from personal liability for debts incurred after dissolution. The court stated that the existence of a majority rule was only persuasive if the rule is based on statutes like those in Kentucky, and the court stated that many of the cases in other jurisdictions proclaiming the majority rule depended on statutes different from Kentucky's and may not even reflect the current statutory law in those jurisdictions. Under the Kentucky statutory provisions regarding dissolution, reinstatement, and liability protection of agents of LLCs, Shannon was not personally liable based merely on her status as an agent of an administratively dissolved LLC. Likewise, the court concluded that the retroactive effect of reinstatement meant there was never a failure of Shannon's authority as an agent of the LLC. Pannell argued that Shannon lacked authority to act on behalf of the LLC because there was no LLC in existence when the second lease was signed and the dissolution statute limited the LLC's permitted activities to winding up its business. But the court noted that a dissolved LLC continues to exist under the Kentucky LLC statute, and the retroactive effect of reinstatement creates a "seamless existence and functionality for the LLC" so that there was never a failure of Shannon's authority. Pannell complained that the LLC's reinstatement occurred only after he filed suit, and Pannell suggested that the court's reading of the statute had an inequitable effect, but the court characterized reinstatement as a matter between the state and the LLC and pointed out that Pannell received what he expected in the transaction.
Thomas v. Bridges
__ So.3d __, 2014 WL 1800076 (La. 2014)
Thomas, a Louisiana resident, formed a Montana LLC solely to avoid the Louisiana sales tax on a recreational vehicle. Montana is the only state that does not impose sales tax on the purchases of vehicles by its residents, including resident LLCs, and Montana LLCs are commonly formed for the sole purpose of avoiding sales tax. The purchase of the RV was the only business conducted by the LLC, and the RV was kept in Mississippi. The Louisiana Department of Revenue assessed sales tax against Thomas on the RV, and Thomas appealed the assessment to the Board of Tax Appeals, which affirmed the assessment. The district court reversed the assessment, and the court of appeals upheld the reversal. The Louisiana Supreme Court concluded that the Department did not establish a basis to assess Thomas individually for the tax and affirmed the lower courts' reversal of the assessment. The supreme court acknowledged that the purpose of forming an LLC is to protect the LLC's members from personal liability, and the court stated that the Department erred in ignoring the LLC's separate existence and assessing Thomas individually before establishing any basis for doing so. After Thomas appealed the assessment, the Department contended that the veil of the LLC should be pierced, but the supreme court stated that "this after-the-fact appraisal the veil should be pierced does not change the fact the existence of [the LLC], a validly formed Montana LLC, was ignored in derogation of Louisiana's statutory protections for LLCs, Louisiana's obligation under the United States constitution to provide full faith and credit to the laws of Montana, and Thomas's constitutional right to due process." Instead of pursuing Thomas individually, the court stated that the Department should have first assessed the LLC. Under the Louisiana LLC statute, the question of whether the LLC was validly formed and the extent of personal liability of the members are governed by the law of the jurisdiction of organization of the LLC, but the Department never applied Montana law in determining whether to pierce the LLC's veil. Beyond concluding that the LLC would have been the proper party against whom to assess the tax, the court did not speculate how the legal error of neglecting to examine Montana law might have affected the outcome. The court went on to note that the Department could still have assessed Thomas individually, even if no personal liability existed under Montana law, if the Department established fraud on the part of Thomas, relying on a provision of the Louisiana LLC statute that provides that nothing in the statute shall be in derogation of any rights a person may have against a member of an LLC because of any fraud practiced on the person. There was no evidence, however, of any fraud on Thomas's part. The court stated that taking actions to avoid sales tax does not constitute fraud. Specifically, "[u]se of particular entities to avoid taxes and other liabilities, far from being fraudulent, is a common and legal practice." LLCs may be formed for "any lawful purpose" under both Louisiana and Montana law, and the court stated that a finding that formation of an LLC solely for tax avoidance constitutes fraud would potentially destabilize Louisiana law. The court refused to consider other theories of legal liability made by the Department for the first time on appeal, and the court stated that policy arguments made by the Department and amici were better directed to the legislature.
Llewellyn-Jones v. Metro Property Group, LLC
__ F.Supp.2d __, 2014 WL 2214209 (E.D. Mich. 2014)
The plaintiff sued numerous Michigan LLCs and individual officers for fraud and other causes of action. The individual defendants sought dismissal of counts that were based on "corporate officer responsibility/liability." The court acknowledged that Michigan law permits corporate officials to be held liable for their individual tortious acts done in the course of business or for personally causing their corporation to act unlawfully, but the court stated that "corporate officer responsibility/liability" is not a cause of action or theory of liability. The vague allegations in the complaint did not contain facts supporting an inference of joint enterprise liability pursuant to which the conduct of any corporate or individual defendant could be imputed to the other defendants. The plaintiffs also alleged that the individual defendants were the alter egos of the LLCs and thus liable for the obligations of the LLCs. The court discussed Michigan law on piercing the corporate veil and held that the plaintiffs' pleadings alleged insufficient facts to support a claim to pierce the veil. The allegations in this regard were largely a conclusory recitation of factors considered in an alter ego claim, and these bare assertions without factual support were insufficient. In connection with allegations regarding the sole membership of a PLLC law firm, the court noted that the separate existence of a corporation is generally recognized even if a single shareholder owns all the stock, and the court stated that the same holds true for professional corporations.
Phillips Brothers v. Winstead
129 So.3d 906 (Miss. 2014)
Winstead, Simmons, and Phillips Brothers, LP ("Phillips") formed an LLC to operate a catfish hatchery and farm. The LLC operating agreement provided that Winstead, Simmons, and Phillips each had a 1/3 ownership interest and that Simmons was the manager. The members agreed that Winstead would be the hatchery operator and would receive a salary and certain other benefits. The LLC was funded with bank loans. The LLC was profitable only two of the eight years that Winstead was the hatchery operator, and Simmons fired Winstead in 2007. In 2009, Winstead sued the LLC, Simmons, and Phillips alleging various causes of action. Winstead obtained a judgment from the trial court for compensatory and punitive damages. The issues raised in this appeal to the Mississippi Supreme Court included the following: (1) whether admission of testimony regarding an oral agreement for cash contributions violated the parol evidence rule; (2) whether there was sufficient evidence to support Winstead's award for fraud; (3) whether there was sufficient evidence to support Winstead's award for corporate freeze-out; and (4) whether there was sufficient evidence to support Winstead's award for breach of fiduciary duty.
First, the court considered whether the LLC operating agreement precluded admission of parol evidence regarding capital contribution obligations. The trial court allowed testimony by Winstead and Winstead's expert regarding an alleged oral agreement by Simmons and Phillips to provide $600,000 in cash contributions for the purchase of startup equipment and fish inventory. The trial court allowed the testimony because the operating agreement was silent as to the contributions. Article VI of the operating agreement stated that the members shall contribute property more particularly described in Schedule A and that no member was required to make any capital contributions except as set forth in that provision. Schedule A was blank. The supreme court concluded that the "silence" in Schedule A did not create an ambiguity and that the agreement clearly provided that no member was required to make any capital contribution other than as provided in Schedule A, in which nothing was listed. Thus, it was error for the trial court to go outside the operating agreement to consider the intent of the parties.
The court next considered Winstead's fraud claim, which was based on a purchase by Simmons and Phillips of an adjacent catfish farm and withholding of pay from Winstead's salary. Winstead alleged that LLC funds were used to purchase the adjacent catfish farm and that Simmons led Winstead to believe that the LLC acquired it. The adjacent catfish farm was actually acquired in the name of Simmons and Phillips, who then allowed the LLC to use it as part of the hatchery operation rent-free. Simmons testified that Winstead was unwilling to join in the purchase because he did not feel the bank would lend him more money. The supreme court concluded that the evidence was insufficient to prove that the funds used to purchase the adjacent catfish farm came from the LLC and that Winstead's mere assertion that he thought the LLC owned it was no enough to carry his burden that he was defrauded. The court also examined the evidence regarding Winstead's claim that Simmons and Phillips fraudulently withheld pay from Winstead's salary and concluded the evidence did not support the finding on the amount Winstead alleged was withheld. In was undisputed that Winstead was aware deductions were being made from his salary. Although Winstead disagreed as to whether some of the charges were personal in nature, there was no evidence that Phillips ever made any representation to Winstead regarding his pay and no evidence that any shortage was caused by Winstead's reliance on any fraudulent representation by Simmons.
The court next discussed in depth the freeze-out cause of action recognized in Mississippi and concluded that Winstead had failed to prove that he was frozen out of the LLC by Simmons. Relying on traditional elements for an intentional tort claim and Mississippi case law involving closely held corporations and LLCs, the court stated that a plaintiff asserting a corporate (or LLC) freeze-out must establish: (1) the existence of a legally defined duty owed to or right of a minority shareholder arising out of the shareholder's ownership interest in the corporation; (2) the intentional or willful breach of that duty by the majority or controlling shareholder(s); (3) that the breach proximately caused plaintiff's direct injury; and (4) the fact and extent of injury. In evaluating the duties and alleged breach, the court will look to the parties' agreement and applicable state law. In this case, the court looked at applicable case law, the LLC operating agreement, and Mississippi LLC statute in effect at the time. Winstead alleged that Simmons and Phillips took actions to exclude Winstead from his ownership interest without justification and in willful disregard of Winstead's rights. In support of his claim, Winstead argued Simmons and Phillips did not make required cash contributions to start the LLC and misappropriated funds from the LLC. As discussed above, the court held that the alleged oral agreement to make cash contributions was inadmissible and that the evidence did not support Winstead's allegations that Simmons or Phillips committed fraud by misappropriating LLC funds. Winstead also argued that Simmons made detrimental loans to the LLC without Winstead's consent, did not allow Winstead to inspect the books and records, and mismanaged the LLC after Winstead was fired. Because the operating agreement gave Simmons full and complete authority to manage the LLC, including the power to borrow money and make all other decisions, the court rejected Winstead's arguments that he was denied participation as a "true managing shareholder." Winstead's approval was not required for the actions Simmons took, and the evidence showed that the LLC would have ceased operating without the loans made to the LLC by Simmons' other entities. The court concluded that termination of Winstead's employment was not evidence of a freeze-out because Mississippi is an employment-at-will state, there was nothing in the operating agreement that guaranteed employment, and there was evidence that Simmons was acting pursuant to a legitimate business purpose in firing Winstead. With respect to Winstead's claim regarding inspection of the LLC's books and records, there was no evidence to show that Winstead was denied access to the LLC's offices or that he even attempted to inspect the records as he had a right to do under the operating agreement; however, the operating agreement also required Simmons to furnish each member a balance sheet for each accounting period, which Simmons failed to do after Winstead was fired. Although Simmons arguably breached a duty to Winstead by not providing balance sheets, Winstead did not show how this damaged him. Simmons eventually delivered voluminous financial records to Winstead, and the court found this claim had no merit. Finally, the court reviewed the evidence regarding mismanagement and concluded that there was no evidence of willful or wanton mismanagement damaging Winstead alone. In sum, the court concluded that Winstead failed to prove he was frozen out of the LLC. Simmons did not use his control to breach a duty to Winstead by denying Winstead his proportional share of any LLC benefits. None of the actions taken by Simmons circumvented the powers given him by the operating agreement, and neither Simmons nor Phillips ever received any payment from the LLC in the form of salary, dividends, or any other distribution. The court thus reversed and rendered the judgment of corporate freeze-out.
The court next discussed Winstead's breach of fiduciary duty claim as distinct from his corporate freeze-out claim. Winstead asserted that Simmons and Phillips negligently, carelessly, and intentionally failed to perform their duties as managing officers of the LLC so that the assets of the LLC were mismanaged, wasted, and diverted to Simmons and Phillips in 2008 after Winstead was fired. The court noted that Winstead's freeze-out claim was an individual claim stemming from an intentional breach of a duty owed directly to Winstead that caused him personal damages separate and apart from damages to the LLC. By contrast, a claim that Simmons breached his duty through mismanagement or dissipation of assets belongs to the LLC because the wrong damages the LLC and damages Winstead only derivatively. (Earlier in the opinion, when discussing the mismanagement allegations as they related to the freeze-out claim, the court noted that the defendants never challenged whether Winstead should be permitted to bring the derivative claims of mismanagement in a direct action; therefore, the derivative claims were tried by consent, and the pre-trial procedural requisites applicable to derivative actions were waived.) The court noted its holdings in previous cases that directors and officers in a closely held corporation stand in a fiduciary relationship with the corporation and its shareholders and that this rationale applies equally to LLCs. Before looking to any common-law standards of care, the court looked to the agreement of the parties, i.e., the LLC operating agreement. The operating agreement led the court to conclude that Simmons, as a manager, owed a fiduciary duty to the members, but the operating agreement also indemnified Simmons from any actions he took on behalf of the LLC as long as he conducted himself in good faith and reasonably believed his conduct was in the LLC's best interest. To prevail on his breach of fiduciary duty claim, the court stated that Winstead must at the very least prove that Simmons breached the operating agreement. Because there was no evidence that Phillips ever took part in the day-to-day operations of the LLC or was involved in the alleged acts of mismanagement, the court reversed and rendered the trial court's judgment that Phillips breached a duty by mismanaging the LLC's assets. Although Simmons, as manager of the LLC, owed a duty to Winstead even after Winstead was fired, the court found numerous problems with Winstead's evidence on damages and held that Simmons was entitled to a new trial on Winstead's breach of fiduciary duty claim against him.
Hibbs v. Berger
430 S.W.3d 296 (Mo. App. 2014)
The plaintiff was employed by an LLC as a salesperson and later obtained a 5% non-voting economic interest in the LLC. At the time the plaintiff obtained his interest, the LLC's founder (Taylor) sold half of his interest to Wood Nuts, Inc. ("Wood Nuts"). Thus, Taylor and Wood Nuts each owned 47.5% of the economic interest in the LLC and 50% of the voting interest in the LLC. Wood Nuts was owned by another individual (Berger) and his sister. The LLC was governed by a board of two managers, one appointed by Taylor and one by Wood Nuts. Taylor appointed himself, and Wood Nuts appointed Berger. The LLC encountered financial difficulty, and Wood Nuts made several secured loans to the LLC. The LLC defaulted on the loans and voluntarily surrendered the collateral. Wood Nuts accepted the collateral in satisfaction of the LLC's indebtedness although the amount of indebtedness exceeded the value of the collateral. The plaintiff eventually terminated his employment and sued the LLC for commissions, salary, and benefits that he alleged he was owed. The plaintiff obtained a judgment against the LLC and then filed a lawsuit against Wood Nuts, Berger, and Taylor alleging, inter alia, claims based on veil piercing and breach of fiduciary duty. The plaintiff settled with Taylor. The trial court granted summary judgment in favor of the remaining defendants, and the plaintiff appealed.
With respect to the veil-piercing claim, the court of appeals acknowledged that members of an LLC and shareholders of a corporation are generally protected from liability, but the court then described the circumstances under which courts will pierce the corporate veil or disregard the business entity. In this instance, the court first addressed whether a minority member or shareholder may pierce the entity veil to impose liability on the majority shareholders or other insiders. The court reviewed case law from other jurisdictions because this was a question of first impression in Missouri, and the court concluded that fairness precluded a per se rule that minority shareholders cannot pierce their own corporate veil. The court discussed outside and insider reverse piercing and noted that a number of jurisdictions permit reverse piercing. While offering no guidance on the availability of reverse veil piercing in Missouri, the court concluded that minority shareholders should be able to pierce the veil in "appropriate circumstances" since the trend in other jurisdictions is to permit majority shareholders themselves to pierce the veil in appropriate circumstances. The court proceeded to analyze whether the facts of this case constituted appropriate circumstances. The plaintiff alleged that the defendants used their complete domination and control to: transfer money to themselves in the form of repayment of loans and salary increases, forego repayment of commissions allegedly due the plaintiff; secretly amend the operating agreement to permit fraudulent transfers; and fraudulently transfer assets resulting in the LLC' undercapitalization. The court examined the evidence and concluded that it was reflective of the downturn in the economy rather than a scheme to defraud. The court saw no evidence that the operating agreement was amended secretly or in bad faith. The court agreed that the LLC had financial difficulties and may have been poorly managed, but the plaintiff did not show a genuine issue of material fact that the LLC was undercapitalized or that the defendants perpetrated fraud to hide assets or used their limited liability for improper purposes. Thus, veil piercing was not warranted.
The court next addressed the plaintiff's claim for breach of fiduciary duty against the defendants. The court stated that the critical issues were "what, if any, fiduciary duties are established by virtue of creation of a limited liability company, and to whom do members and managers of limited liability companies owe a fiduciary duty." The court characterized these issues as "uncharted waters." Specifically, the inquiry in this case boiled down to whether Wood Nuts, a member but not a manager, and Berger, a manager but not a member, owed fiduciary duties to the plaintiff. The court started by reviewing the provisions of the Missouri LLC statute, the plain language of which evidences that managers (member or non-member) of an LLC owe fiduciary duties to the LLC itself. What remains unsettled is whether managers of an LLC owe fiduciary duties to members of the LLC. The court stated that a review of case law from other jurisdictions, the statutes interpreted in those cases, and commentary on the subject revealed that Missouri's statute was most analogous to jurisdictions that impose fiduciary duties upon managers to members of the LLC. Further, the court said this conclusion was consistent with the articulation of the statutory standard of care ("with the care of a corporate officer of like position...") and the statutory directive to apply the rules of equity in a case not provided for. Because Missouri imposes on corporate directors fiduciary duties to the corporation and its shareholders, the court concluded the statute envisioned that managers owe fiduciary duties to members. The court then proceeded to analyze the operating agreement because the LLC statute permits fiduciary duties to be defined or limited in the operating agreement. The court pointed out that a provision of the operating agreement stated that a member shall have no fiduciary duty not to declare a default or initiate enforcement or collection of a loan. In addition, the operating agreement limited the liability of managers and members acting in good faith and in a manner reasonably believed to be within the scope of the operating agreement. Based on these provisions, the court concluded that the fiduciary duties Berger owed by statute were abridged by the operating agreement so that Berger did not owe the plaintiff fiduciary duties. With respect to Wood Nuts, the court pointed out that the Missouri LLC statute provides that one who is a member of a manager-managed LLC owes no duties to the LLC or other members solely by reason of acting in his capacity as a member. The court observed that some jurisdictions have found that controlling members owe fiduciary duties to minority members, but the court did not address this argument because the plaintiff did not raise it.
In the course of addressing a claim for tortious interference with business relationship by the plaintiff against Berger, the court addressed the plaintiff's argument that amendments to the LLC operating agreement were unfair and illegal. The court acknowledged that Missouri law implies a covenant of good faith and fair dealing in every contract, but the court said the plaintiff proffered no evidence of any illegal or unfair conduct by the defendants. The court commented that the plaintiff seemed to have forgotten that he had little control over the operations of the LLC as a 5% economic owner, which was the bargain he agreed to.
GE Mobile Water, Inc. v. Red Desert Reclamation, LLC
__ F.Supp.2d __, 2014 WL 1056938 (D.N.H. 2014).
The plaintiff sued an LLC and its parent corporation for the LLC's failure to fulfill its obligations under a contract with the plaintiff. The parties cited both New Hampshire and Virginia law, and the court stated that neither party made a serious attempt to analyze the choice-of-law issues or claimed that its argument on any issue depended upon how choice-of-law questions were resolved. The court thus applied New Hampshire law without any choice-of-law analysis. The court stated that it followed the New Hampshire Supreme Court's practice of assuming without deciding that members and managers of LLCs may be held liable based on veil-piercing theory in an appropriate case, and the court expressed no view as to whether veil-piercing principles as applied to LLCs differ from veil-piercing principles as applied to corporations. The plaintiff alleged that the LLC and its parent operated out of the same business address and that the entities had common officers. In addition, the plaintiff alleged that the LLC was severely undercapitalized and that the parent offered to pay a portion of the LLC's debt, which the plaintiff argued permitted an inference of intermingling of funds. The pleadings described the LLC's winding up of operations after six months, not even one-third of the way through a $3.2 million contract. The plaintiff alleged that the LLC paid only $20,000 on more than $1 million owed to the plaintiff, that the manager made promises about payment that were not kept, and that the parent made misrepresentations about the funding for the project. The court concluded that the facts alleged by the plaintiff were sufficient to show that the LLC and its parent "bent the rules regarding corporate formalities and failed to adequately capitalize [the LLC] so as to cover its prospective debts." The court also concluded that the plaintiff sufficiently alleged that the actions were taken to promote an injustice on the LLC's creditors. Thus, the court denied the parent entity's motion to dismiss the veil-piercing claim.
Sync Labs LLC v. Fusion Manufacturing
Civ. No. 2:11-0367 (WHW), 2013 WL 4776018 (D.N.J. Sept. 4, 2013), motion for reconsideration denied, 2014 WL 37124 (D.N.J. Jan. 6, 2014)
An LLC and its founder sued Ferchak, an individual who became involved in the LLC by contributing services and capital, for breach of contract and various other causes of action after Ferchak withdrew his pledge to invest $250,000, demanded the return of $20,000 he had already paid in exchange for units in the LLC, and resigned from the LLC. Ferchak counterclaimed for violations of the New Jersey Wage Payment Law and New Jersey Uniform Securities Law, and the LLC's founder sought summary judgment on the counterclaims (moving only on his own behalf because the court had disqualified him from representing the LLC pro se).
The court granted summary judgment in favor of the plaintiffs (including the LLC even though its founder was not able to represent it) on the wage payment claim. According to the work for hire agreement Ferchak entered into, Ferchak agreed to work part-time and was entitled to a specified number of Class B Units of Profit Interest (BUPIs) in the LLC for each hour of work performed for the LLC. The summary judgment evidence established that Ferchak received the BUPIs to which he was entitled under his agreement; therefore, there was no genuine issue of material fact as to whether he received the compensation to which he was entitled. Although Ferchak made various demands for monetary compensation, he submitted no evidence to support a claim that he was entitled to any compensation other than the BUPIs.
The court denied the plaintiff's motion for summary judgment on Ferchak's claim under the New Jersey Uniform Securities Law (NJUSL). Ferchak's claim for violation of the NJUSL was based on his purchase of 4,000 Class A Units of Profit Interest (AUPIs) for $20,000. The court acknowledged that the sale of the units was exempt from registration under the NJUSL even if the units were securities, but securities sold in exempt offerings are not exempt from the civil liability provisions, and the court concluded that there were fact issues as to whether the AUPIs were "stock" and thus securities under the NJUSL. Because the issuer of the AUPIs was an LLC, the court analyzed the AUPIs as membership interests in an LLC. The definition of "securities" in the NJUSL is essentially identical to the federal securities laws, and the court thus relied on case law applying the federal securities laws. The court first analyzed whether the AUPIs were "investment contract" securities. The court focused on the prong of the Howey test that requires the profits of the investment to be dependent "solely" on the efforts of others, and the court concluded that Ferchak's involvement in the management of the LLC was sufficient to preclude his AUPIs from constituting an investment contract. Ferchak's work for hire agreement gave him extensive management responsibilities, and he was not a passive investor, but rather a member-manager of the LLC. The court concluded, however, that the possibility remained that Ferchak's AUPIs might be "stock" and thus "securities" under the NJUSL. Under the Supreme Court's two-part test for whether an investment is "stock," a court should first determine whether the investment is labeled as "stock." If it is, the court must then determine whether the investment possesses significant characteristics typically associated with stock, i.e., (1) the right to receive an apportionment of profits, (2) negotiability, (3) the ability to be pledged or hypothecated, (4) voting rights in proportion to the number of shares owned, and (5) the capacity to increase in value. The court described the Fourth Circuit's application of this analysis in Robinson v. Glynn to an LLC interest as follows: "this test is a one-way ratchet: if an investment is labeled a 'stock,' it may not be, but if the investment is not labeled a stock, the analysis is over." The court stated that the nomenclature issue in Robinson v. Glynn was dispositive because the membership interest was not labeled as "stock" although it had some characteristics of stock. Here, the court stated that the parties disagreed over what "unit of profit interest" meant, but the court pointed out that the plaintiff referred to the interest as "stock" in one of his submissions to the court. Assuming arguendo that the AUPIs are stock, the court next considered whether the AUPIs shared the five characteristics of stock outlined by the United States Supreme Court. The court stated that the first, fourth, and fifth factors were satisfied, but there was nothing in the record to show whether the second and third factors were satisfied. The court stated that these facts were material and genuinely disputed, thus precluding summary judgment. On the plaintiff's motion to reconsider, the court stated that nothing in the NJUSL explicitly states that LLC membership interests can never be "stock," and the court cited the Fourth Circuit's opinion in Robinson v. Glynn and the District of Delaware's decision in Great Lakes Chemical Corp. v. Monsanto in support of its assertion that "courts routinely consider the possibility that LLC membership interests might fall under the protection of state and federal securities laws, not only as 'investment contracts' but also as 'stock.'" The court stated that the courts in those cases determined that the LLC interests in those cases were not stock, not that an LLC interest can never be stock.
Pokoik v. Pokoik
982 N.Y.S.2d 67 (App. Div. 1st Dept. 2014)
The court held that the plaintiff, a nonmanaging member of an LLC, was entitled to summary judgment against the managing member on the plaintiff's claims for breach of fiduciary duty. To settle a dispute, the plaintiff and the managing member had agreed that "discrepancies" in payments made by the plaintiff would be written off upon payment by the plaintiff of $2.2 million. Both parties knew that the amounts at issue were more than the $2.2 million amount agreed upon to settle the discrepancies. The managing member contended that he was then informed by the accountant that the written-off funds would have to be accounted for and that the managing member followed the accountant's instructions to place the entire burden on the plaintiff. Neither the operating agreement nor the settlement agreement provided for a unilateral reduction of the plaintiff's account, and the managing member did not inform the plaintiff of the accountant's recommendation or notify the plaintiff that his capital account, and no one else's, was reduced to address the tax situation. Later, also without notice to the plaintiff, the managing member discontinued distributions to the plaintiff. The managing member claimed that the plaintiff was not singled out for harmful treatment because the distributions were made in proportion to capital accounts, but the plaintiff was the only member whose capital account was written down.
The court stated that the managing member owed the nonmanaging member an undivided duty of loyalty that barred not only blatant self-dealing but also avoidance of situations in which the managing member's personal interest would possibly conflict with the interest of the nonmanaging member. The court rejected the managing member's reliance on the statutory defense of reliance on outside professionals and the business judgment rule because the managing member did not meet his initial burden of showing that he acted in good faith and with undivided loyalty. The court stated that the managing member had an interest in reducing the plaintiff's capital account, as opposed to charging certain amounts to the LLC, because charging the LLC would have had a negative financial impact on the managing member. The managing member's failure to make truthful and complete disclosures and his conflict of interest in choosing to burden only the plaintiff did not show undivided loyalty. The court rejected all of the managing member's affirmative defenses. The first defense was based on the provision of the LLC operating agreement governing distributions, but the court stated that the managing member's lack of good faith was revealed by the fact that distributions were made for three years after the plaintiff's capital account was emptied and then suddenly discontinued without explanation. The second defense was rejected because the plaintiff refuted the contention that the settlement agreement required a general reconciliation that was performed by the accountant and revealed fraudulent entries of expenses by the plaintiff. The court rejected the defense of the business judgment rule because of the evidence of lack of good faith on the managing member's part. The managing member alleged that the nonmanaging member had unclean hands based on certain disbursements, but that claim was released by the settlement agreement. The court rejected the managing member's defense of waiver based on the plaintiff's K-1s (which showed a negative capital account balance for several years) because the plaintiff was never alerted by the accountant of the change to his account or that his accounts were treated differently from those of other members. The court stated that the nonmanaging member's claims were not released by the settlement agreement and that the nonmanaging member could assert his breach of fiduciary duty claim against the managing member without joining the LLC as a party. In sum, while the managing member may have relied on the accountant's opinion in reducing the plaintiff's capital account, the court concluded that the failure of the managing member and the accountant to inform the plaintiff of the decision and of the subsequent elimination of distributions established the plaintiff's claim that the managing member was not acting in the plaintiff's best interest and breached his fiduciary duty of care.
Kennebrew v. Harris
425 S.W.3d 588 (Tex. App. 2014)
Kennebrew founded a private security company as an LLC, and Kennebrew was initially the sole manager and member. The parties executed a management agreement under which Harris obtained a 40% interest in the LLC in exchange for a capital contribution of $10,000. After a short time, Harris became unhappy with Kennebrew's financial reporting and the LLC's failure to reimburse Harris for amounts expended on behalf of the LLC, and Kennebrew was unhappy that Harris did not become licensed or registered under the Texas Private Security Act. Less than a year after joining the LLC, Harris notified Kennebrew of his intent to withdraw. The LLC accepted Harris's withdrawal, and the parties could not agree on the amount that Harris was owed. Harris sued Kennebrew and the LLC. The trial court appointed an accountant who reviewed the LLC's records and determined the value of the LLC's assets, liabilities, and member equity. Harris's evidence on these matters differed only with respect to the amount of an outstanding loan balance owed by the LLC to Harris. The trial judge entered a judgment rescinding the management agreement, concluding there was an oral loan agreement between the parties, and holding Kennebrew and the LLC liable to Harris for damages and attorney's fees. All parties appealed.
The court of appeals analyzed the trial court's rescission of the management agreement and concluded that rescission was improper. (Although Kennebrew and the LLC presented all their arguments jointly, and the trial court made no distinction between the rights and obligations of Kennebrew and the LLC, the court of appeals referred to the contract claims and arguments as those of the LLC alone because the court determined that the contractual obligations at issue ran solely between Harris and the LLC.) Because the LLC did not prevail on its counterclaims, it established no wrong on the part of Harris to support rescission. Further, even if the LLC had prevailed on its counterclaims, the LLC failed to establish that it satisfied the preconditions for rescission because it did not notify Harris that the contract was being rescinded, did not return or offer to return Harris's capital contribution and loans, and did not offer to pay Harris interest representing the value of the benefit derived from the use of his money. The LLC argued that rescission was nevertheless appropriate because the management agreement was unenforceable. The LLC argued that the management agreement never became effective based on a provision requiring execution of all documents necessary to effectuate the provisions of the agreement. The LLC argued that this provision required Harris to register with the Texas Department of Public Safety-Private Security Bureau as required by the Private Security Act. Assuming Harris was required to register, which the court did not decide, the court held that Harris's failure to register did not render the management agreement unenforceable. The Private Security Act does not provide that a contract with a person who fails to register as required by the statute is void or unenforceable, and the statute provides other means of encouraging compliance in the form of criminal and civil penalties.
The court of appeals found no evidence in the record to support the trial court's finding of an oral loan agreement, but Harris argued that the management agreement entitled him to be repaid the amount he was owed for goods and services purchased for the LLC. The court of appeals agreed. Two provisions of the management agreement addressed loans by members. One provision stated that a member with the managers' consent may advance needed funds to pay obligations of the LLC if the LLC lacked sufficient to pay its obligations. Another provision stated that if a member made a loan to the LLC or advanced money on the LLC's behalf, the amount of such loan or advance was a debt due from the LLC and not a capital contribution. These provisions entitled Harris to recover the amount the trial court found he spent on the LLC's behalf.
The trial court's judgment awarded Harris the return of his capital contribution (as a result of rescission of the management agreement) and repayment of his loans, but Harris argued that he was entitled to recover the value of his interest in the LLC (not merely the return of his capital contribution) in addition to repayment of the loans. The court of appeals agreed that Harris was entitled to recover the value of his 40% interest. Under the Texas LLC statute, an LLC member may withdraw only if permitted by contract, but a member who validly exercises a right of withdrawal provided by the company agreement is entitled to be paid the fair value of the member's interest in the LLC as determined as of the date of withdrawal. Both the management agreement and the company agreement expressly permitted a member to withdraw, and the evidence showed that Harris validly exercised that right. The trial court found that the value of Harris's interest on the date of withdrawal was $44,849, which was 40% of the members' total equity as found by the court-appointed accountant. The LLC did not argue that subtracting the LLC's liabilities from its assets was an inappropriate means of determining the members' equity, but asserted that Harris was not entitled to 40% of the entirety of the members' equity. Based on a provision of the management agreement that provided a member was not entitled to the return of any portion of his capital contribution or to be paid interest on his capital account or capital contribution, the court said that the LLC reasoned that the sum of the capital contributions of the two members "should be subtracted from the total members' equity before calculating the value of Harris's share–but not before calculating the value of Kennebrew's share." The court characterized this argument as conflating two different concepts, stating that "a distribution to a withdrawing member of the value of his interest is not the same as a return of capital." The court stated that there was no testimony in the record supporting the LLC's argument and that it contradicted the trial court's finding and the statute. Thus, the court of appeals held that Harris was entitled to recover the value of his membership interest as found by the trial court.
Kennebrew argued on appeal that there was no basis to hold him personally liable for the amounts owed to Harris, and the court of appeals agreed. The Texas LLC statute provides that a member or manager is not liable for the LLC's debts, obligations, or judgments unless the company agreement specifically provides otherwise. Further, the company agreement in this case expressly provided that no member or manager shall be liable for the debts, obligations, or liabilities of the company. Both the funds advanced by Harris to the LLC and the distribution owed for the value of his interest were liabilities only of the LLC. The attorney's fees were based on Harris's recovery for breach of contract under the Texas Civil Practice and Remedies Code. To recover attorney's fees under that provision, a party must prevail on a breach-of-contract claim and recover damages. Because Harris was entitled to damages for breach of contract only from the LLC, the court concluded there was no basis to hold Kennebrew jointly and severally liable for attorney's fees. Harris argued that the trial court properly held Kennebrew jointly and severally liable because he refused to give Harris access to the LLC's books and records thereby breaching the management agreement and committing shareholder oppression, but the trial court did not find that this conduct caused Harris any damages. Thus, the court of appeals held that the trial court erred in holding Kennebrew jointly and severally liable with the LLC for its debts, obligations, or liabilities.
Nwokedi v. Unlimited Restoration Specialists
428 S.W.3d 191 (Tex. App. 2014)
Nwokedi and an LLC appealed a judgment against them in favor of a company that provided restoration services to the LLC's property after it was damaged in Hurricane Ike. The plaintiff's claims included claims for fraud, breach of contract, and fraudulent transfer, and the jury found in favor of the plaintiff on all its theories. The judgment awarded compensatory and punitive damages, voided four fraudulent transfers by Nwokedi and the LLC, imposed a constructive trust on fraudulently transferred insurance proceeds, and enjoined Nwokedi and the LLC from transferring any assets not subject to execution.
The plaintiff's common-law fraud claim was based on the plaintiff's contention that Nwokedi and the LLC intended to keep the insurance proceeds for themselves when they promised to pay for the plaintiff's work with the insurance proceeds. The court of appeals concluded that the evidence supported the jury's finding that Nwokedi and the LLC did not intend to pay the plaintiff as promised. Nwokedi argued on appeal that the evidence was insufficient to support a finding of individual liability on his part. The court recited the rule that a corporate officer who knowingly participates in tortious or fraudulent acts may be held individually liable to third persons even though the officer was acting as an agent of the corporation. The evidence showed that Nwokedi, who owned a controlling interest in the LLC, knowingly participated in its fraud. Nwokedi participated in the contract negotiations with the plaintiff and personally reassured representatives of the plaintiff that the insurance company was acting on the LLC's behalf and that the plaintiff would be receiving payments from the insurance company. Nwokedi sent several emails to the insurance company instructing it not to issue checks to the plaintiff. Thus, the court concluded there was evidence that Nwokedi knowingly participated in the fraud.
The fraudulent transfer claims were based on several transfers of funds from the LLC's bank account to various other accounts. The plaintiff alleged that these transfers were made with the intent to hinder, delay, or defraud the plaintiff. Nwokedi and the LLC argued on appeal that there was insufficient evidence to support the jury's finding that Nwokedi and the LLC fraudulently transferred property with the intent to hinder, delay, or defraud creditors. Based on the jury's finding, the trial court set aside four transfers of insurance proceeds, amounting to $618,000, from the LLC's account to other accounts. The court set forth the "badges of fraud" and explained that the Texas Uniform Fraudulent Transfer Act (TUFTA) permits avoidance of a fraudulent transfer to satisfy a creditor's claim or an attachment against the asset transferred as well as allowing a judgment in favor of a creditor for the lesser of the value of the asset transferred or the amount necessary to satisfy the creditor's claim. The court pointed out that a tort claimant is entitled to file causes of action under the TUFTA based on pending, unliquidated tort claims. The court discussed each transfer and concluded the evidence supported a finding that the transfers were fraudulent. The court pointed to evidence of several badges of fraud, including that Nwokedi was an "insider," that the accounts to which the transfers were made were held in the name of or controlled by Nwokedi, that Nwokedi attempted to conceal the transfers, and that the transfers were made after the plaintiff sued the LLC. Nwokedi and the LLC argued that one of the amounts that was found to be a fraudulent transfer could not be a "transfer" because the funds were lost or unaccounted for. The court pointed out the broad definition of a "transfer" as including "every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset... [including] payment of money." The court concluded that the evidence supported the reasonable conclusion that Nwokedi received the purportedly missing funds and later disposed of or parted with them within the meaning of the TUFTA. The court also rejected the argument that a creditor is required to trace specific funds under the TUFTA. A constructive trust could only be imposed on traceable funds, but the other funds could be included in an award of damages. Nwokedi argued that he could not be held individually liable for the fraudulent transfers because there was no evidence that the assets transferred were his assets. The court rejected this argument on the basis that a corporate officer who knowingly participates in tortious or fraudulent conduct may be held individually liable to third persons even though the officer performed the act as an agent of the corporation.
In re Lau (Pacific Addax Co., Inc. v. Lau)
Bankruptcy No. 11-40284, Adversary No. 11-4203, 2013 WL 5935616 (Bankr. E.D. Tex. Nov. 4, 2013).
The debtors, John and Deborah Lau, were in the real estate business, and the plaintiffs sought a determination that the Laus' debts for the plaintiffs' losses in real estate ventures managed by the Laus were nondischargeable on various grounds, including as debts arising from fraud or defalcation in a fiduciary capacity. The plaintiffs' claims related to their investments in the acquisition of a tract of land in Melissa, Texas (the "Melissa Property") and the development of a tract of land in Denton County, Texas (the "Craver Ranch"). John Lau, as managing member of JNC Partners, LLC ("JNC"), accepted $600,000 from the plaintiffs and agreed to hold the funds until it was determined how to allocate and apply the funds between the Melissa Property and the Craver Ranch. Deborah Lau was also a manager of JNC and was active in its business operations.
Once it was determined how much the plaintiffs were investing in each property, Melissa Fourteen, Ltd., a limited partnership, was formed for the acquisition of the Melissa Property. JNC became the general partner of the limited partnership, and the plaintiffs became limited partners. The limited partnership agreement provided that title to the Melissa Property would be taken in the limited partnership, but John Lau, as managing member of JNC, acquired the Melissa Property in the name of JNC. Thereafter, John Lau, as managing member of the managing general partner of the limited partnership, issued capital calls to the plaintiffs based on false representations regarding the partnership and its financial needs. The capital infusions were diverted by John Lau for his own business purposes and those of JNC. JNC eventually sold the Melissa Property and satisfied JNC's indebtedness and that of the Laus on their guaranties. The plaintiffs received no return on their investments in the Melissa Property. The court discussed the fiduciary duty of a general partner to the limited partnership and its limited partners under Texas law, relying on opinions of Texas courts of appeals and federal courts applying Texas law. The court went on to address fiduciary duties in a "two-tiered partnership arrangement," concluding that John Lau stood in a fiduciary relationship with Melissa Fourteen, Ltd. and its limited partners because he was the managing member of the managing general partner. The court concluded that the amount of the plaintiffs' initial investment designated for investment in the Melissa Property and the amounts provided by the plaintiffs pursuant to the capital calls made by John Lau were debts for both fraud and defalcation by John Lau while acting in a fiduciary capacity and as such were excepted from discharge. Additionally, the court concluded that Deborah Lau knowingly participated in her husband's breach of fiduciary duty and ratified the breach of duty by knowingly accepting the benefits derived from the breach. Thus, Deborah Lau's liability for these debts was excepted from discharge as well.
John and Deborah Lau were the sole members of JNC Partners Denton, LLC ("JNC Denton"), which owned and sought to develop Craver Ranch. Part of the $600,000 investment of the plaintiffs was used to purchase interests in JNC Denton, and the plaintiffs became members of JNC Denton. John Lau exercised complete control over JNC Denton as the sole managing member. As the managing member of JNC Denton, John Lau issued capital calls, which were promptly paid by the plaintiffs. When the capital calls were made, John Lau supplied false information to the plaintiffs regarding the LLC, and the capital infusions made by the plaintiffs were diverted by John Lau for his own business purposes and those of JNC. The plaintiffs received no return on their investments in JNC Denton. The court concluded that John Lau breached his fiduciary duties to the LLC and its members. The court noted that the Texas LLC statute does not directly address the duties owed by LLC managers and members but provides that the company agreement of an LLC may expand or restrict duties, including fiduciary duties, and related liabilities that a member, manager, officer or other person has to the company or to a member or manager. The court stated that the statute thus implies that certain duties may be owed without defining them and allows the contracting parties to specify the breadth of those duties in the company agreement. The LLC agreement of JNC Denton conferred on John Lau as the manager-member the power and authority to act on behalf of the company subject to limitations set forth in the agreement and "the faithful performance of the Managers' fiduciary obligations to the Company and the Members." Thus, the court concluded that John Lau stood in a fiduciary relationship to the plaintiffs as members of the LLC. The court stated that recognition of this fiduciary duty was consistent with the degree of control exercised by John Lau as the managing member. The court also concluded that John Lau's representations and acts in connection with the capital calls were acts of fraud and constituted defalcations. The court noted that, for purposes of a "defalcation" under Section 523(a)(4) of the Bankruptcy Code, the United States Supreme Court recently rejected an objective recklessness standard in favor of a heightened culpability standard requiring "'knowledge of, or gross recklessness in respect to, the improper nature of the relevant fiduciary behavior.'" Because John Lau's debts to the plaintiffs arose from fraud and defalcation in a fiduciary capacity they were excepted from discharge. Additionally, the court concluded that Deborah Lau knowingly participated in her husband's breach of fiduciary duty and ratified the breach of duty by knowingly accepting the benefits derived from the breach. Thus, Deborah Lau's liability for these debts was excepted from discharge as well.
Although the court concluded that the Laus' debts to the plaintiffs were excepted from discharge as debts arising from fraud and defalcation in a fiduciary capacity, the court stated that a claim arising from a manager's embezzlement of funds intended for the use and benefit of a company would belong to the company rather than the individual shareholders or members. Thus, the court held that the diversion of the funds received in the capital calls on behalf of the limited partnership and LLC was embezzlement as to the limited partnership and LLC and not its partners or members, and embezzlement was not a basis for an exception to discharge as to the plaintiffs.
Houk v. Best Development & Construction Company, Inc.
322 P.3d 29 (Wash. App. 2014).
The plaintiffs moved into a newly constructed home in 2004 and sued the LLC developer in 2010 after discovering defects in the home. The LLC was administratively dissolved by the Washington Secretary of State in 2006. Under the 2006 version of the Washington LLC statute, the three-year statute of limitations applicable to claims against a dissolved LLC began to run on the effective date of an LLC's dissolution regardless of whether the LLC was administratively or non-administratively dissolved. In 2010, the Washington legislature amended the LLC statute to provide that the dissolution of an LLC does not take away or impair any remedy to or against an LLC for any pre- or post-dissolution claim or liability unless the LLC has filed a certificate of dissolution. If the 2010 version applied retroactively, the plaintiff's lawsuit was timely, but under the prior version, the plaintiffs were required to file their lawsuit within three years from the date of the LLC's administrative dissolution. The court analyzed the amended version and concluded that the plaintiffs failed to show legislative intent that it apply retroactively or that it was clearly curative or remedial. Thus, the court followed the presumption that the amended statute operated prospectively, and the plaintiffs' suit was time-barred.


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Attributes / Specifications
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Attributes / Specifications
Ingredients & Guaranteed Analysis
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- Primary BrandRoyal Canin
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subset: commoncrawl


text:
Space City
From Fanlore
- This disambiguation page lists articles associated with the same title. If an internal link led you here, you may wish to change the link to point directly to the intended article.
- Space City, a Blake's 7 mailing list founded in 1995, superseded by Freedom City in 1999
- Space City, a Blake's 7 convention


text:
to Web Labs at ReactorLab.net
Dynamic diffusion and reaction in a porous solid catalyst layer
The overall reaction is A ⇀ B and is far from equilibrium under conditions here. Reactant A adsorbs reversibly over catalyst surface sites S: A + S ⇌ AS. Select Model 1 or 2. Click the Run button below. Hit the enter key or click out of field after changing inputs.
Select the "slow" rate determining step below: Model 1 (simple) or 2 (self-inhibiting).
Click here for more information (opens in new tab)
See space-time plot of rate, and average rate and conversion at bottom
Enter max inlet A conc:
Enter Kflow
Enter Kads
Enter Kdiff
Enter Thiele Modulus
Enter alpha
Enter B out scale factor
Enter cycling period
Enter square duty cycle % on
Gas profiles
catalyst layer
profiles in
catalyst layer
Average Rate (dimensionless turnover frequency) =
Average Conversion of A =
outer, gas-catalyst interface:
Space-Time plot of reaction rate
inner, sealed surface:
Click the Run button to start. Hit the enter key or click out of field after changing inputs.