Kentucky Adopts Significant Amendments to its … XXVII, No. 3 32 Kentucky Adopts Significant...

Volume XXVII, No. 3 32

Kentucky Adopts Significant Amendments to its Partnership and LLC(and even its Corporate) Laws

By: Thomas E. RutledgeStoll Keenon Ogden PLLC

Louisville, Kentucky

The 2010 Kentucky General Assembly, bymeans of Senate Bill 150 (2010 Kentucky Acts, ch.133) enacted significant amendments to thePartnership, LLC and Corporate Acts. Theseamendments were effective July 15. In addition,Kentucky has adopted a unified Business EntityFiling Act; that Act has an effective date of January1, 2011, and those developments are not reviewedin this piece.

In summary:

Personal Responsibility for One’s Own Torts

In Barone v. Perkins, a ruling of the KentuckyCourt of Appeals, it was suggested that the limitedliability shield afforded under the LLC Act is broaderthan that under the Business Corporation Act. Inthe Business Corporation Act the limited liabilityprovision is qualified by language repeating the ruleof Section 7.01 of the Restatement (3rd) of Agency.In contrast, the LLC Act did not contain thatlanguage. On this basis, the Court suggested thatthe liability shield of an LLC is broader than thatunder a corporation and that it is not qualified by theretention of liability for the consequences of one’sown act or conduct. Seeking to avoid such apregnant affirmative in the future and adopting therules of numerous other Kentucky appellatedecisions that have not found that distinction to beimportant, as necessary the rule of Section 7.01has been written into the limited liability provisionsacross all business form.

Charging Order

The Kentucky statutes set forth fivedifferent charging order provisions. All of thoseprovisions, including those set forth in the stilleffective Kentucky adoptions of UPA and RULPA,have been rewritten so that they are consistent withone another. As such, the rights of the judgmentcreditor and the judgment debtor vis-à-vis of aninterest in a partnership/LLC/limited partnership willbe the same.

Fiduciary Duties in LLCs

The fiduciary duty language of the KentuckyLLC Act is based upon Section 404 of the 1992Prototype LLC Act. That language has this yearbeen modified to expressly label the duty of careand the duty of loyalty, as set forth therein. Inaddition, there was added to the LLC Act aprovision stating expressly that all parties to anoperating agreement are bound by a contractualobligation of good faith and fair dealing.

The Doctrine of Independent Legal Significance

The “Doctrine of Independent LegalSignificance” has been written into the BusinessCorporation Act, the LLC Act and the Kentuckyadoptions of RUPA and ULPA(2001).

Dissolution of an LLC

First, the provision addressing the dissolution ofan LLC has been revised for purposes of clarifyingwhich of the effects may and may not be modifiedby the operating agreement. Second, it has beenmade express that dissolution of an LLC does notof itself amend the operating agreement orterminate otherwise enforceable capital contributionobligations.

A Member’s Right to Resign

Adopting the model set forth in the 1992Prototype LLC Act, the Kentucky LLC Act (asenacted in 1994) provided that a member couldwithdraw from the LLC and receive the fair value oftheir interest. In 1998 this provision was amendedto delete the right of resignation, submitting in placea statement that a member could not resign unlessgiven that capacity in a written operating agreementor is as otherwise approved by all of the othermembers. This abolition of the right to withdrawwas done at the request of the estate planning barwith an eye towards avoiding the “applicablerestriction” limitations of Code § 2704(b). Likewisein 1998, Kentucky’s adoption of RULPA wasamended to similarly restrict the right of withdrawalof a limited partner.


Under the formulation employed in Kentucky(and in many other states), a member in a member-managed LLC owes fiduciary obligations to thecompany and in certain instances to the othermembers. Conversely, in a manager-managedLLC, only the managers, qua managers, owefiduciary duties. Read together, the provisionsaddressing fiduciary duties and the right ofwithdrawal equate to a situation in which a memberin a member-managed LLC is bound by fiduciaryobligations while having no capacity to resign fromthat position and thereby, on at least a prospectivebasis, terminate the potential fiduciary liability.Seeing that as an unacceptable situation, thestatute has been amended to (a) retain the existingrule within a manager-managed LLC, i.e. there is noright to withdraw unless afforded in a writtenoperating agreement or as otherwise approved byall of the other members and (b) in a member-managed LLC, giving each member the right towithdraw from the company. This right ofwithdrawal may be eliminated or conditioned in awritten operating agreement. A member whowithdraws will become an assignee of their ownlimited liability company interest with the effect that“capital lock-in” is retained.

Limits on Distributions by LLPs

The LLP provisions of Kentucky’s adoptionsof RUPA and UPA have been supplemented to limitdistributions when the partnership is either balancesheet insolvent or unable to meet its debts andobligations as they come due in the ordinarycourse. There is a two year look-back period forthe recovery of improperly made distributions, andthere is no defense to the return based upon thefact that the recipient partner was unaware that thedistribution was improper, that being the standardemployed in the LLC Act.

Foreign Limited Partnerships Transacting Businessin Kentucky Without Qualifying To Do So

Addressing a lacuna in the Uniform LimitedPartnership Act (2001), KyULPA has beensupplemented to add a provision addressing theeffect of a limited partnership transacting businesswithout having qualified to do so. Adopting thesame rules applicable to corporations and LLCs,the limited partnership is subject to a per diem fineand is deprived of the capacity to maintain anaction. Still, the actions of the limited partnershipundertaken while it was not qualified remain validand binding, and the partners continue to enjoywhatever limited liability they would otherwiseenjoy. If a limited partnership initiates legal actionwhen it was obligated to qualify but had not done

so, the court has the authority to stay the action togive the limited partnership time to qualify.

Consequences for Defaulting on ObligationsUndertaken in Partnership and OperatingAgreements

Each of the LLC Act, KyRUPA and KyULPAhave been amended to expressly permit theoperating/partnership agreement to define penaltiesand consequences for failure to perform on anobligation undertaken therein including forfeiture ofthe interest in the company. These amendmentsare in furtherance of a multi year effort to overrulethe decision of the Kentucky Supreme Court in ManO War Restaurants, Inc. v. Martin, wherein theCourt held that a share restriction agreementrequiring the shareholder, upon termination ofemployment, to sell their stock back at the originalsale price was a forfeiture and/or an unreasonableliquidated damage, either of which was in violationof Kentucky public policy. In 2002, in directresponse to this ruling, the Kentucky BusinessCorporation Act was amended to preclude a similarresult in the future. The 2010 amendmentspreclude the argument that, although no longerapplicable to business corporations, the publicpolicy basis for such limitations should continue toapply in the context of either a partnership or anLLC.

L3Cs

A free standing proposal that Kentucky adoptL3Cs was converted into a study committee.


CASES INVOLVING LIMITED LIABILITY COMPANIES ANDREGISTERED LIMITED LIABILITY PARTNERSHIPS

By: Elizabeth S. MillerBaylor Law SchoolWaco, Texas

LLC and LLP cases not identified in previous issues of the PUBOGRAM are noted below.

Limited Liability Companies:

Personal Jurisdiction

Vichi v. Koninklijke Philips ElectronicsN.V., Civil Action No. 2578-Vcp, 2009 WL 4345724(Del. Ch. Dec. 1, 2009). Vichi made a loan to aDelaware LLC which was a subsidiary of a jointventure between two foreign companies. The LLCwent bankrupt and defaulted on the loan to Vichi.Vichi then sued various parties. Among otherclaims, Vichi brought breach of fiduciary duty claimsagainst an individual citizen of Singapore whoresided in China and was an officer of the jointventure and employed by a subsidiary of the jointventure that was the sole member and manager ofthe LLC. The individual successfully moved fordismissal of the claims against him for lack ofpersonal jurisdiction because neither the Delawarelong-arm statute nor the implied consent provisionof the LLC statute provided a basis to exercisejurisdiction over him. The court determined that theformation of the LLC in Delaware and the allegedbreaches of fiduciary duty owed to the LLCprovided no basis for specific jurisdiction over theindividual as to any of the claims asserted againsthim. The implied consent provision of the LLCstatute did not apply because the individual was nota manager of the LLC appointed pursuant to theoperating agreement nor did he participatematerially in its management. The individual wasemployed by the sole member and manager of theLLC but had no personal stake in the LLC. Nospecific facts were alleged showing the individualpersonally participated materially in themanagement of the LLC rather than acting at thedirection of and as a representative for themember/manager and its parent.

Boston Scientific Corporation v. WallCardiovascular Technologies, LLC, 647 F.Supp.2d 358 (D. Del. 2009) (rejecting argument thatTexas LLC was subject to personal jurisdiction inDelaware as alter ego of Delaware LLC becauserecord did not show sufficient level of control,absence of corporate formalities, or fraud, injustice,

or inequity in use of corporate form; recognizingseparate legal existence of LLC and its membersunder Texas law and rejecting argument thatpersonal jurisdiction over LLC is proper in anyforum in which LLC’s members are subject tojurisdiction).

Citrin Holdings, LLC v. Minnis, 305S.W.3d 269 (Tex. App 2009) (holding New Yorkresident and Delaware LLC wholly owned by NewYork resident were subject to specific jurisdiction inTexas based on multiple Texas contacts andTexas-based contractual obligations; holding twoother foreign LLCs were subject to specificjurisdiction in Texas based on activities in Texasattributable to the LLCs).

More Cupcakes, LLC v. Lovemore LLC,No. 09 C 3555, 2009 WL 3152458 (N.D. Ill. Sept.24, 2009) (holding fiduciary shield doctrine did notshield sole owners and operators of LLC engagedin business transactions in Illinois from personaljurisdiction because doctrine does not apply topersons with ownership in corporation who havediscretion to choose whether to do business inIllinois).

Taddeo v. American Invsco Corporation,No. 2:08-CV-01463-KJD-RJJ, 2009 WL 2951118(D. Nev. Sept. 8, 2009) (rejecting LLC manager’sargument that he was protected by fiduciary shielddoctrine and finding exercise of personal jurisdictionover individual appropriate based on considerableactivity directed at forum and acts of fraud andpersonal tort liability alleged).

Diversity Jurisdiction

Federal courts of appeals and district courtscontinue to hold that an LLC has the citizenship ofeach of its members for diversity jurisdictionpurposes. Recent opinions at the Circuit Court ofAppeals level recognizing this rule include: Delayv. Rosenthal Collins Group, LLC, 585 F.3d 1003(6th Cir. 2009) and Hukic v. Aurora LoanServices, 588 F.3d 420 (7th Cir. 2009). A few cases


have arisen in which the courts have discussed thedifferent approach taken in the Class ActionFairness Act. A recent opinion in this context isKurth v. Arcelormittal USA, Inc., Cause No. 2:09-CV-108RM, 2009 WL 3346588 (N.D. Ind. Oct. 14,2009) (noting that rule that LLC’s citizenship isdetermined by citizenship of its members forpurposes of diversity jurisdiction does not applyunder Class Action Fairness Act and holdingIndiana LLC was citizen of Indiana under CAFA rulethat unincorporated association is citizen of state inwhich its principal place of business is located andstate under whose laws it is organized).

Service of Process

Bryden v. Lakeside Ventures, LLC, 218P.3d 61 (Mont. 2009) (holding kitchen manager ofLLC restaurant had apparent authority to acceptservice of process on LLC under rule permittingservice on LLC by leaving copy of complaint andsummons at office or business of company withperson in charge of such office).

Myan Management Group, L.L.C. v.Adam Sparks Family Revocable Trust, 292S.W.3d 750 (Tex. App. 2009) (holdingdiscrepancies in names on cross-claim, citation,and return did not render service improper whereLLC designators varied only slightly and did notsuggest different entity than that listed in petitionwas served).

818 Asset Management, Inc. v. Neiman,22 So.3d 659 (Fla. App. 2009) (per curiam opiniondiscussing propriety of service of process on LLCby substituted service on secretary of state).

Zollo v. Springer, No.NNHCV095030989S, 2009 WL 3740734 (Conn.Super. Oct. 19, 2009) (holding that LLC may beserved under provision regarding service of processon corporation in addition to methods providedunder other provisions of law).

Technipower, LLC v. Mustang VacuumSystems, LLC, No. CVV095007190S, 2009 WL3645708 (Conn. Super. Oct. 8, 2009) (discussingapplication of Connecticut long-arm statutes toforeign LLC and concluding defendant LLC wassubject to personal jurisdiction under provisionapplicable to foreign partnerships but that provisionapplicable to foreign corporations does not apply toforeign LLCs).

Pasquariello Electric Corp. v. Nyberg,No. CV085024983, 200( WL 3739445 (Conn.

Super. Oct. 7, 2009) (discussing application ofConnecticut long-arm and service of processstatutes to foreign LLCs).

Interior Environments, Inc. v. WA445Associates, LLC, No. CV065003285, 2009 WL3644739 (Conn. Super. Sept. 24, 2009) (addressingservice of process provisions applicable to LLCs incontext of mechanic’s lien limitations issue).

LVNV Funding, LLC v. Boyles, __ So.3d__, 2009 WL 3415306 (Ala. Civ. App. 2009)(holding individual who signed affidavit in which sheclaimed to be attorney in fact for LLC was notmanaging or general agent for purposes of ruleaddressing service of process on LLC; holding thatDelaware LLC’s failure to register to do business inAlabama did not relieve plaintiff of complying withrequirements set forth in rule regarding service ofprocess on LLC).

Lizarzu v. Vallejos, Civil Action No.1:08cv858, 2009 WL 3055443 (E.D. Va. Sept. 22,2009) (finding LLCs were properly served underVirginia statutes through substituted service onclerk of State Corporation Commission).

Venue

In re Fountainebleau Las VegasHoldings, LLC, No. 09-21481-BKC-AJC, 2009 WL3669648 (Bankr. S.D. Fla. Oct. 26, 2009)(discussing management structures of LLCs and“working down corporate trail” of various LLCs todetermine that Board of Managers of parent LLCexerted substantial control over member-managedLLC debtor subsidiaries and that principal place ofbusiness of debtors for venue purposes was Floridasince major decisions affecting debtors occurred inFlorida).

Pro Se Representation

In re Heal, No. 09-13206, 2009 WL4510128 (Bankr. N.D. Cal. Nov. 30, 2009) (strikingpro se litigant’s pleadings in collection actionbecause litigant acquired judgment from LLC, whichcan only appear in court through licensed counsel,and company cannot avoid effect of rule by“assignment” of its rights to principal).

Lawrence Frumusa Land Development,LLC v. Arnold, 421 B.R. 110 (W.D.N.Y. 2009)(holding debtor LLC could not be represented bynon-lawyer owner).


Temple v. Eighth Judicial District Court,No. 54386, 2009 WL 3429743 (Nev. 2009) (statingthat corporation or LLC may not be represented bynon-lawyer and dismissing petition filed byindividual purportedly on behalf of corporation andLLC).

Lippenberger v. Canal Properties, No.CGC 05444673, 2009 WL 335685 (Cal. App. 1 Dist.Oct. 20, 2009) (noting that LLCs cannot appear inpropria persona).

Burbank Holdings, LLC v. United States,No. 2:08-CV-01588-KJD-RJJ, 2009 WL 3571284(D. Nev. Sept. 9, 2009) (stating LLC must appearthrough licensed attorney).

Taitt v. Secretary, Civil Action No. 09CV-12576, 2009 WL 3164899 (E.D. Mich. Aug. 17,2009) (stating that LLCs are artificial entities thatmust be represented by counsel in federal court).

Standing

Wilcox v. Weber Insurance, 982 A.2d1053 (Conn. 2009) (holding managing member andanother member sufficiently alleged interests inautomobile and umbrella insurance policies so as tohave standing to sue insurer that refused to defendand indemnify in connection with accident involvingdump truck owned by LLC).

Felton v. Teel Plastics, Inc., 664 F.Supp.2d 937 (W.D. Wis. 2009) (dismissing breachof fiduciary duty claim brought by individual minoritymember of LLC because claim belonged to LLCrather than individual).

Wilcox v. Webster Insurance, Inc., No.CV075010093, 2009 WL 2872805 (Conn. Super.Aug. 5, 2009) (holding individual members of LLCestablished classical aggrievement so as to havestanding to sue insurance company wheremembers were seeking to enforce their own rightsas well as the rights of their LLC).

Derivative Suits

Vichi v. Koninklijke Philips ElectronicsN.V., Civil Action No. 2578-Vcp, 2009 WL 4345724(Del. Ch. Dec. 1, 2009). Vichi made a loan to aDelaware LLC which was a subsidiary of a jointventure between two foreign companies. The LLCwent bankrupt and defaulted on the loan to Vichi.Vichi then sued various parties. Among otherclaims, Vichi brought breach of fiduciary duty claimsagainst an individual citizen of Singapore who

resided in China and was an officer of the jointventure and employed by a subsidiary of the jointventure that was the sole member and manager ofthe LLC. The individual successfully moved fordismissal of the claims against him for lack ofpersonal jurisdiction because neither the Delawarelong-arm statute nor the implied consent provisionof the LLC statute provided a basis to exercisejurisdiction over him. However, the court stated thateven if it had not dismissed the claims against himfor lack of personal jurisdiction, it would havedismissed the breach of fiduciary duty claims forfailure to state a claim because Vichi failed toestablish that his fiduciary claims were cognizableunder Delaware law. The court stated that creditorsof a Delaware corporation that is insolvent or in thezone of insolvency have no right to assert directbreach of fiduciary claims, and the court concludedthat the same rule applies in the LLC context. Thecourt then analyzed whether Vichi’s fiduciary claimwas direct or derivative based on who suffered thealleged harm and who would receive the benefit ofrecovery. The court found that Vichi alleged thatthe individual breached his fiduciary duty to Vichi asa creditor and that Vichi had personally suffereddamages. Moreover, Vichi’s prayer for reliefdemanded that he personally receive recompensefor the value of the notes, among other damages.The court therefore concluded that Vichi’s breach offiduciary duty claims were direct, and Vichi, as acreditor of a Delaware LLC, could not bring a directclaim for breach of fiduciary duty. Thus, Vichi hadfailed to state a claim for which relief could begranted under Delaware law with respect to hisfiduciary duty claims.

Firehouse Gallery, LLC v. Phillips, No.8:09-CV-698-T-17-MAP, 2009 WL 4015575 (M.D.Fla. Nov. 19, 2009) (holding derivative claim onbehalf of Delaware LLC was not properly pledbecause Delaware law requires demand futility tobe plead with particularized factual allegations andplaintiff did not plead demand futility but merelyargued demand futility was evident on face ofrecord).

Lola Cars International Limited v. KrohnRacing, LLC, CA Nos. 4479-VCN, 4886-VCN,2009 WL 4052681 (Del. Ch. Nov. 17, 2009). LolaCars International, Ltd. (“Lola”) and Krohn Racing,LLC (“Krohn”) formed a Delaware LLC and agreedto equal representation on the governing boardalthough Lola owned a 51% interest in the LLC andKrohn held a 49% interest. Krohn appointed itsmanager, Hazell, as its director, and agreed tocontribute Hazell’s services as the LLC’s CEO.Lola brought two suits against Krohn and Hazell,


and the defendants moved to dismiss both of Lola’scomplaints. Among Lola’s claims were claimsthat Hazell breached his fiduciary duties of loyaltyand care, and Krohn aided and abetted Hazell’sdisloyalty. Krohn moved to dismiss Lola’s fiduciaryclaims on the ground that Lola failed to pleaddemand futility with particularity as required by theDelaware LLC statute. The court noted that it relieson corporate precedent in interpreting thisrequirement and that demand is consideredexcused in the corporate context when allegationsin the complaint create a reason to doubt that(1) the directors are disinterested and independent,or (2) the challenged transaction was otherwise theproduct of a valid exercise of business judgment.The court denied Krohn’s motion because Lolasatisfied the particularized pleading standard byclaiming that Hazell faced a substantial risk ofliability due to his failure to maintain appropriateinventory levels and pay state taxes in a timelyfashion and his use of LLC assets for Krohn’sbenefit in violation of his duty of loyalty to the LLC.Furthermore, the court noted that where thedirectors of a two-director board have equal votingpower and one is interested, demand should beexcused because that one interested director alonehas the power to preclude litigation.

Mathis v. ERA Franchise Systems, Inc.,25 So.2d 298 (Miss. 2009). Mathis, a 50% memberof an LLC, sued the other member and severalother parties alleging claims that included derivativeclaims. Mathis argued that he was entitled to bringclaims of a derivative nature in a direct actionrelying on case law in the closely-held corporationcontext. In Derouen v. Murray, the MississippiSupreme Court determined that an action by oneshareholder against another was a derivative actionbut stated in a footnote that it could be brought as adirection action, relying on the American LawInstitute Principles of Corporate Governance. Thecourt stated that the question is left to the discretionof the trial judge, however, and concluded that thecomplexity of the instant case militated againstapplication of the doctrine. The court stated thatcases in other jurisdictions revealed that thedoctrine is usually employed in purelyintracorporate disputes, and this case involvedclaims against current and former owners as well asdefendants who were never owners or members ofthe LLC. Given the number of parties and theexistence of counterclaims and cross-claims, thecourt thought it likely that a direct recovery wouldinterfere with a fair distribution of the recovery orexpose the entity to a multiplicity of actions.Further, one of the parties asserted that it wasowed money by the LLC, making it a potential

creditor that would be prejudiced by direct recoveryby Mathis. Mathis argued that he should be givenleave to amend to assert a derivative action andthat he should not be required to make demandbecause demand would be futile. Because Mathisnever presented these arguments to the trial courtand made clear that he was only interested inproceeding directly, the trial court did not err indismissing the derivative claims with prejudice.Finally, Mathis argued that he should be allowed toproceed with the claims that were not derivative, butthe trial judge did not specify which claims weredismissed as being derivative in nature. The courtanalyzed the various claims relying on principlesfound in Fletcher’s Cyclopedia of the Law ofCorporations and the ALI Principles of CorporateGovernance and concluded that all of the claimsexcept for certain claims against a former memberwere derivative.

Natomas Gardens Investment GroupLLC v. Sinadinos, No. CIV. S-08-2308 FCD/KJM,2009 WL 3055213 (E.D. Cal. Sept. 14, 2009)(disqualifying attorney from representing both LLCand its officer in derivative action and directing LLCto retain independent counsel without prior ties toLLC or other parties to case).

Julian v. Julian, Civil Action No. 4137-VCP, 2009 WL 2937121 (Del. Ch. Sept. 9, 2009).Three brothers owned and operated several LLCstogether, and the plaintiff (“Gene”) sued his brothers(“Francis” and “Richard”) after he resigned as amember of several of the LLCs. Gene sought torecover the fair value of his interests in the LLCsbut Gene conceded that the claims for fair value ofthe interests in certain of the LLCs should bepursued in arbitration, and the court determined thatthe claims for fair value in the remaining LLCs werealso subject to arbitration. In addition to seeking torecover the fair value of his LLC interests, Geneasserted derivative claims for damages on behalf oftwo LLCs for recovery of excess management feesthat were charged by the management companyowned by Francis and Richard. The defendantsmoved to stay the derivative claims. The courtstated that it would consider any preclusive effectsof a pending arbitration elsewhere on the actionbefore the court as well as any burden imposed byboth litigating and arbitrating at the same time indifferent forums. The LLCs subject to the derivativeclaims did not have arbitration clauses in theiragreements. Ultimately, the court denied thedefendants’ motion to stay on the basis that theLLCs, the LLC agreements, and the claims involvedin the derivative claims were sufficiently differentand distinct from those that were being arbitrated.


The court did not find that a significant risk ofinconsistent judgments would be caused byallowing the litigation on the derivative claims tocontinue while arbitration began on the otherclaims.

Ward v. Gamble, No. CV085017829S,2009 WL 2781541 (Conn. Super. July 23, 2009)(noting that Connecticut LLC statute is silent onapplicability of derivative actions to LLCs andconcluding that there is no functional or materialdifference between corporations and LLCs thatwould justify treating them differently with respect torules regarding derivative suits; holding thatderivative action was available even if LLC had notbeen formed at time of events alleged becauseConnecticut statute explicitly authorizes derivativeactions for unincorporated associations; analyzingplaintiff member’s claims and concluding thatplaintiff did not have option to bring them directly orderivatively, but could only proceed derivatively;rejecting plaintiff member’s claim that he could notfairly and adequately represent the interests of theother members even though plaintiff was minoritymember who accused remaining members ofwrongdoing because all members would share inany monetary recovery of LLC).

Arbitration

Julian v. Julian, Civil Action No. 4137-VCP, 2009 WL 2937121 (Del. Ch. Sept. 9, 2009).Three brothers owned and operated several LLCstogether, and the plaintiff (“Gene”) sued his brothers(“Francis” and “Richard”) after he resigned as amember of several of the LLCs. The case involvedtwo different versions of Section 18-603 of theDelaware Limited Liability Company Act. For LLCagreements entered into before July 31, 1996, thestatute permitted a member to resign with sixmonths’ notice. For LLC agreements entered intoafter July 31, 1996, the statute prohibits resignationbefore dissolution and winding up unless the LLCagreement states otherwise. Gene sought anaward of fair value for his interest in the pre-1996and post-1996 LLCs, but Gene ultimately concededthat the claims for fair value of the interests in thepost-1996 LLCs should be pursued in arbitration.Gene also asserted derivative claims for damageson behalf of two LLCs for recovery of excessmanagement fees that were charged by themanagement company owned by Francis andRichard. The defendants moved to dismiss the fairvalue claims against one LLC on the basis that theclaims were not ripe and against the remainingLLCs on the basis that they were subject toarbitration. The defendants also moved to stay the

derivative claims. With respect to the arbitrationissue, the court ultimately granted the defendants’motion to dismiss the fair value claims against theremaining pre-1996 LLCs because arbitration wasappropriate. The court divided the arbitrabilityquestion into “procedural” and “substantive”arbitrability relying on James & Jackson, LLC v.Willie Gary, LLC. The procedural arbitrabilityquestion revolved around whether or not the partiescomplied with the arbitration provisions of the LLCagreement. A presumption exists that proceduralarbitrability questions are answered by arbitrators,not by the courts. The court noted that substantivearbitrability was less clear-cut and included adetermination of both the scope of an arbitrationprovision and the broader issues of whether thecontract and/or the arbitration clause were valid andenforceable. The court relied upon a recentchancery court opinion for the proposition that thecourt must first address the question of whodecides whether the parties agreed to submit aparticular dispute to arbitration or to a court.According to that decision, courts presume theparties did not intend to arbitrate arbitrability unlessthere is clear and unmistakable evidence to thecontrary. Clear and unmistakable evidence that theparties intended to arbitrate arbitrability exists if thearbitration clause: (1) generally refers all disputes toarbitration, and (2) references a set of arbitral rulesthat empowers arbitrators to decide arbitrability.The arbitration clause in the present case statedthat any controversy “arising out of or relating to”the agreement shall be settled by arbitration. Thecourt interpreted “arising out of or relating to”broadly, and found the arbitration clause sufficientto satisfy the first prong of the test by generallyreferring all disputes to arbitration. The provisionalso satisfied the second prong by requiring that thearbitration be conducted in accordance with therules of the American Arbitration Association. Geneargued that his request for an award of fair valuewas based on Section 18-604 of the LLC statuteand not the LLC agreement. He further argued thatthe breach of fiduciary duty claims did not arise outof the LLC agreements because the agreementswere “bare bones.” Gene relied on Parfi HoldingAB v. Mirror Image Internet, Inc. for the propositionthat “actions do not touch matters implicated in acontract if the independent cause of action could bebrought had the parties not signed a contract.”Essentially, Gene asked the court to decidewhether his claims arose out of, or related to, theLLC agreements. The court found that if itanswered that question, it would undermine theWillie Gary test. Although the court admitted thatcommon sense required some minor inquiry intowhether the arbitration clause covered the


underlying dispute, it said that, if there was acolorable basis that the dispute is covered by thearbitration clause and the clause satisfies the WillieGary test, then the question of substantivearbitrability should be answered by the arbitratorrather than the court. The court decided that sinceLLCs were creatures of contract, Gene’s request forfair value of his interest was, to some degree,related to the existence of the agreement and itsterms. Finally, the court noted that the policy of thecourt was to defer to arbitration when in doubt.

Googla Home Decor LLC v. Uzkiy, No.09-CV-1049 (CPS)(RML), 2009 WL 2922845(E.D.N.Y. Sept. 8, 2009) (holding arbitration clausein LLC operating agreement employing “arising outof or relating to” language was broad clausecreating presumption of arbitrability, and concludingarbitration clause encompassed breach of fiduciaryduty claim as well as disputes concerning whoexercised majority control and had authority underoperating agreement to take certain acts).

Stay of Proceedings

Choice Hotels Int’l, Inc. v. Columbus-Hunt Park Dr. BNK Investors, L.L.C., C.A. No.4353-VCP, 2009 WL 3335332 (Del. Ch. Oct. 15,2009). The defendants sought a stay of thisproceeding in which the plaintiff, Choice HotelsInternational, Inc. (“Choice”), sought adetermination, under Section 18-110 of theDelaware LLC statute, of the rightful manager of asingle purpose Delaware LLC owning property inOhio. Choice asserted that it validly removed Kleinfrom his position as the sole manager of the LLCand that Choice was the manager of the LLC. Intwo separate suits filed in Maryland, Choice suedthe LLC and Klein, and the LLC and Klein suedChoice. These suits related to loans from Choice toKlein pursuant to which Klein pledged his interest inthe LLC as security for the loans. Klein allegedlydefaulted on the loans, and Choice purported toforeclose on Klein’s membership interest in theLLC, remove Klein as the manager of the LLC, andappoint itself as the replacement manager. Choicecontended that the statutory policy behind asummary action under Section 18-110 of theDelaware LLC statute superseded application of theconventional McWane analysis giving preference toa first-filed action and that Section 18-110 requiredthe court to give precedence to the summaryDelaware action. Section 18-110 provides that theCourt of Chancery “may hear and determine thevalidity of any admission, election, appointment,removal or resignation of a manager of a limitedliability company, and . . . may determine the

person or persons entitled to serve asmanagers . . . .” The court noted that the purposeof Section 18-110 is “to expeditiously resolveuncertainty” within an LLC. Thus, the Court ofChancery will ordinarily deny a motion to stay aSection 18-110 action. However, citing Delawareprecedent, the court acknowledged that when facedwith a request to stay a summary action, the courtbalances the McWane policies of comity andpromotion of the efficient administration of justiceagainst the policies underlying the summary natureof the Delaware action. Under the McWanedoctrine, an action will be stayed if the followingthree questions are answered in the affirmative: (1)whether there is a prior action pending elsewhererelated to the action in Delaware; (2) whether suchother suit involves the same parties and issues; and(3) whether the foreign court is capable of doingprompt and complete justice. The court answeredeach of these questions in the affirmative andfurther found that there was a significant risk thatproceeding with the Delaware action wouldunnecessarily waste time, effort, and expense orresult in inconsistent and conflicting rulings. Thecourt thus held that the McWane policies of comityand the orderly and efficient administration ofjustice supported granting a stay of the Delawareaction. The court next considered whether thebalance of potential harms weighed in favor ofstaying or not staying the action. The court notedthat the LLC had just one asset, and that the LLCcould be expected to maintain its business as usualduring the Maryland action. Thus, the courtconcluded that, under the circumstances, the first-filed rule applied and principles of comity andpromoting the efficient administration of justicerequired that the Delaware action be stayed.

Nature of LLC

Range Resources-Appalachia, LLC v.Blaine Township, Civil Action No. 09-355, 2009WL 3515845 (W.D. Pa. Oct. 29, 2009) (holdingtownship disclosure ordinance requiringcorporations to submit extensive disclosurestatement in order to do business in township wasnot preempted by Pennsylvania LLC statute).

People v. Highgate LTC Management,LLC, 887 N.Y.S.2d 298 (App. Div. 3rd Dept. 2009).An LLC that operated a rehabilitation and extendedcare facility was convicted of various crimes basedon the failure of the LLC’s employees to providerequired care to a patient and falsification of recordsregarding such care. The court held that an LLCcan be held criminally responsible for the acts of itsemployees committed in the scope of employment.


The LLC argued that the doctrine of respondeatsuperior does not apply to crimes that requirespecific intent and that the statutory provision of thePenal Code making respondeat superior applicableto corporations must be strictly construed andcannot apply to unincorporated associations suchas LLCs. The court rejected these arguments,relying on case law involving corporations andunincorporated associations. Though the courtacknowledged that the Penal Code provisionapplying respondeat superior liability tocorporations is inapplicable to an LLC, the courtstated that “long-standing analogous principles thathave evolved through case law remain dispositive.”

Skylake Insurance Agency, Inc. v. NMBPlaza, LLC, 23 So.3d 175 (Fla. App. 2009). Thecourt held that a ten-year commercial lease did notsatisfy a Florida statute applicable to conveyancesof real property because it lacked two subscribingwitnesses as required by the statute for a lease ofmore than one year. Though the lease wasproperly executed under the Florida LLC statute,the court agreed with the views of the RealProperty, Probate and Trust Law Section of theFlorida Bar expressed in its amicus curiae brief andheld that the lease must also comply with thestatutory two-witness requirement. Recognizingthat an LLC is not a corporation, the court rejectedthe argument that an exception in the statute forcorporations applied to the LLC.

In the Matter of MCI Worldcom NetworkServices, Inc., 912 N.E.2d 920 (Mass. 2009)(holding that LLCs are not eligible for utilityexemption available to companies organized ascorporations and rejecting LLC’s argument that itshould benefit from parent’s corporate form).

Pre-Formation Transactions

In the Matter of Hausman, 921 N.E.2d191 (N.Y. 2009). The grandchildren of a decedentargued that property conveyed to an LLC prior tothe decedent’s death was not conveyed to a validLLC and that it should be part of the estate subjectto their distributive interests as stated in thedecedent’s will. The decedent’s two living childrenexecuted articles of organization for an LLC onOctober 4, 2001, but the articles of organizationwere not filed with the Department of State untilNovember 16, 2001. On November 2, 2001, twoweeks before the articles of organization were filed,the decedent deeded the property to the LLC. Thecourt saw no principled reason why the de factocorporation doctrine should not apply to LLCs, andthe court thus agreed with the parties that it did.

The de facto corporation doctrine may be invokedwhen there exists (1) a law under which thecorporation may be organized, (2) an attempt toorganize the corporation, and (3) an exercise ofcorporate powers thereafter. Under the New YorkLLC statute, articles of organization must beexecuted and filed to form an LLC. Here, noattempt to file the articles of organization was madebefore conveyance of the property. The decedent’sson argued that a de facto entity may exist evenwhere it has failed to make an attempt to filestatutorily required organizational papers, but thecourt concluded that merely executing articles oforganization and an operating agreement isinsufficient to meet the requirements of a de factoentity. Because it was undisputed that there wasno bona fide attempt to comply with the ministerialbut essential requirement of filing the articles oforganization prior to the time of the conveyance,there was no entity in existence capable ofreceiving title to the property.

Carcano v. JBSS, LLC, 684 S.E.2d 41(N.C. App. 2009). The plaintiffs asserted claims forbreach of contract, unfair and deceptive tradepractices, unjust enrichment, constructive trust, andcommon law fraud based on the defendants’solicitation of money from the plaintiffs for thepurpose of purchasing properties. The partiesagreed that the venture would be organized as anLLC, and the plaintiffs alleged that one of thedefendants, Browder, represented to them that theLLC was formed when it was not. Severalproperties were deeded to the non-existent LLC,and the court characterized these deeds as voidbecause the LLCs were non-existent. An LLC wasformed by one of the defendants almost two yearsafter the litigation was commenced, but the recorddid not indicate whether new deeds had beenexecuted after the formation of the LLC. The courtfirst held that there were fact issues precludingsummary judgment on the breach of contract claim.Both parties agreed that some contractualarrangement was entered, but there were factissues as to what the terms were and whether theywere breached. The court granted summaryjudgment in favor of the defendants on theconstructive trust issue, stating that it was difficult tosee how a remedy or judgment could be renderedagainst the LLC, should it later be determined to bethe owner of the properties, since the LLC was notformed at the time the complaint was filed. Thecourt held that constructive trust could not beimposed on the individual defendants because theydid not come into possession or control of the legaltitle to the properties deeded to the non-existentLLC. With regard to the unfair or deceptive acts or


practices claims, the court held that the allegeddeceptive practices (marketing memberships in afictitious LLC) were merely assertions that thedefendants asked plaintiffs to invest in a businessarrangement, and these capital raising venturesamong sophisticated business persons fell outsidethe scope of the North Carolina Unfair andDeceptive Trade Practices Act. Also, the court heldthat the allegations did not show that the acts orstatements were “in or affecting commerce” and didnot allege an actual, concrete injury in fact. Finally,the court concluded that the trial court correctlygranted summary judgment against the plaintiffs onthe fraud claim because there was no evidence thatBrowder had any knowledge of the falsity of therepresentation that the LLC had been formed.Further, while agreeing with the plaintiffs thatwhatever undefined relationship existed, it createda fiduciary relationship based on the fundsentrusted to Browder, the court stated that aconstructive fraud claim requires more than afiduciary relationship, and the plaintiffs did not showthat the defendants participated in a transactionthrough which they sought to benefit themselves.

722 W. 43rd St. LLC v. Ali, No. B211263,2009 WL 302001 (Cal. App. 2 Dist. Sept. 23, 2009)(permitting LLC to amend complaint to allege that ithad been formed and had adopted contractalthough it had not yet been formed and lackedcapacity to sue at time complaint was filed becauseLLC may enforce contract made on its behalf beforeformation if it has adopted or succeeded to contractand lack of capacity is legal disability that can becured during pendency of litigation).

Formation or Failure to Form LLC

Douglas v Mundell, No. 1 CA-CV 06-0603,2009 WL 2766746 (Ariz. App. Sept. 1, 2009)(affirming trial court’s dismissal of LLC organizer’sclaims against Arizona Corporation Commissionand its individual members for damages based onalleged failure to process filings in timely manner,failure to correctly inform filers of statutorypublication requirements and enforce requirements,and collection of unlawful expedited filing fees).

Limited Liability of LLC Members andManagers/Personal Liability Under Agency orOther Principles

Aqua Thick, Incorporated v. WildFlavors, Incorporated, No. 08 C 6278, 2009 WL4544696 (N.D. Ill. Dec. 1, 2009) (rejecting argumentthat managing member of LLC is liable to sameextent as officer or director of corporation who

participated in tortious act because legislatureremoved from current LLC statute provisions inprior statute that made managing member liable forLLC’s acts to same extent as director of Illinoiscorporation in analogous circumstances).

J. Stan Developments, LLC v. Lindo, No.2008-CA-001796, 2009 WL 3878084 (Ky. App.Nov. 20, 2009). The court affirmed a judgmentholding the sole member of an LLC personally liablefor violations of Kentucky securities laws. Themember argued that he could not be liable unlessthe LLC veil was pierced, but the court interpretedthe LLC statute and securities laws to provide forliability based on the member’s own participation inthe transaction in issue.

Reserves Development Corporation v.Esham, C.A. No. 07C-12-123 PLA, 2009 WL3765497 (Del. Super. Nov. 10, 2009). An individualcontracted to purchase property intending for anLLC to take title to the property. The plaintiffsdeeded the property to an LLC formed by theindividual and several others, and the plaintiffs latersued the individual for payment of amounts owedunder the purchase agreement and forhomeowners’ association assessments accruedafter the closing. The court determined that apayment obligation under the agreement survivedthe closing, but there were material fact issues as towho had liability for the obligation. The recordraised a genuine issue of material fact as towhether the parties’ conduct gave rise to an impliednovation that would relieve the individual of liability.

Dover Phila Heating & Cooling, Inc. v.SJS Restaurants, Ltd., 923 N.E.2d 220 (Ohio App.2009) (recognizing limited liability of LLC membersunder Ohio law and finding no evidence to showLLC member was liable for LLC’s debt).

Arime Pty, Ltd. v. Organic EnergyConversion Company, LLC, No. C09-5436BHS,2009 WL 3484062 (W.D. Wash. Oct. 26, 2009)(noting that Washington LLC statute permitsimposing personal liability on member or managerfor member’s or manager’s own torts).

BCI Construction, Inc. v. Whelan, 888N.Y.S.2d 272 (App. Div. 3rd Dept. 2009)(recognizing that agent who contracts for non-existent principal may be held personally liable oncontract, but finding that member who signed onbehalf of LLC that was mistakenly identified as“Halfmoon Construction, LLC” rather than“Halfmoon Constructors, LLC” was not personally


liable where there was no allegation that plaintiffwas misled or prejudiced by such misnomer).

O’Neal v. Campbell, Civil Action No.5:09cv110-DCB-JMR, 2009 WL 3489868 (S.D.Miss. Oct. 23, 2009) (finding plaintiff employed byLLC had adequately alleged claim against LLCmembers as “employers” under Fair LaborStandards Act based on allegations regardingmanagerial and supervisory responsibilities).

Lippenberger v. Canal Properties, No.CGC 05444673, 2009 WL 335685 (Cal. App. 1 Dist.Oct. 20, 2009) (concluding LLC member waspersonally liable for fees for legal services renderedat his request, notwithstanding that fee agreementwas not in writing, regardless of whether member orLLC was client).

Blue Star Corporation v. CFK Properties,LLC, 980 A.2d 1270 (Me. 2009). The courtreviewed the record as it bore on the issue ofwhether the sole owner and president of an LLCwas liable as the LLC’s alter ego or based on theindividual’s own participation in wrongful acts. Thecourt found that there were unresolved factualissues and vacated the trial court’s summaryjudgment that the individual could not be heldindividual liable for participation in wrongful actscausing damage to the plaintiff.

831 Bartholomew Investments-A, L.L.C.v. Margulis, 20 So.3d 532 (La. App. 2009)(recognizing limited liability of LLC members underLouisiana LLC statute along with statute’spreservation of potential personal liability for fraud,negligence or other wrongful act, and concludingcomplaint did not adequately allege facts supportingfraud or unfair or deceptive acts or practices ofindividuals so as to state cause of action againstthem for personal liability).

Domestic Construction, LLC v. Bank ofAmerica, N.A., No. CV07-5357BHS, 2009 WL2853255 (W.D. Wash. Sept. 1, 2009) (recognizinglimited liability of LLC members under Washingtonlaw subject to exceptions for member’s own torts,contributions member has agreed to make, return ofwrongful distributions, and veil piercing, andconcluding numerous questions of fact regardingbusiness relationship of LLC and individual(including evidence of commingling of assets anddisrespect of corporate form) precluded summaryjudgment in favor of individual on personal liabilityissue).

Jongebloed v. Texas LotteryCommission, No. 03-08-00154-CV, 2009 WL

2837698 (Tex. App. Aug. 31, 2009). The courtconcluded that the Texas Lottery Commission failedto establish that the appellant, Jongebloed, was an“officer, director, or owner” of an LLC licensed bythe Commission to sell lottery tickets. TheCommission relied upon Jongebloed’s status assuch to hold him personally liable under the lotterystatute for lottery sales proceeds owed to theCommission by the LLC. The LLC’s 2001 licenserenewal application filed in 2001 identifiedJongebloed as vice president of the LLC, butJongebloed argued that he was not an officer,director, or owner in 2002 when the LLC’s liabilityaccrued. He presented evidence that he severedany ties with the LLC in 2000 and that any LLCfilings to the contrary were in error. The courtreviewed the evidence and found that theCommission’s findings, on their face, did notsupport its legal conclusion that Jongebloed was amember of the LLC when the lottery proceedsbecame due. The court stated that membership inan LLC is an interest in personal property akin tostock ownership or a partnership interest. Althoughthe Commission made findings that Jongebloed hadbeen identified in LLC filings as a vice president(i.e., an officer) and manager (which the courtcharacterized as “essentially the equivalent of adirector”), the Commission made no findings that hewas ever a member. The court stated that being amanager or officer of an LLC does not mean one isalso a member. Managers and officers may, butneed not be, members, and managers and officersdo not by that status alone have a membershipinterest in the entity. In fact, the Commissionconceded that Jongebloed’s liability did not stemfrom being an “owner,” but rather depended uponhis status as an “officer or director.” Jongebloedoffered evidence that he resigned from the LLC in2000, but the Commission took the position onappeal that he remained a manager and director ofthe LLC until a written record of the resignation wasfurnished to the Commission in 2003. In responseto the Commission’s suggestion that a resignationas an LLC manager must be in writing to beeffective, the court noted that the Texas LimitedLiability Company Act includes no requirement thata manager’s resignation be in writing. In any event,the court noted that Jongebloed’s resignation hadbeen memorialized in a written resolution of themanaging member in which Jongebloed’sresignation was accepted and recognized by theLLC as of September 1, 2000. The courtaddressed the Commission’s argument that themeaning of “officer and director” for purposes of theprovision of the lottery statute imposing personalliability was affected by the LLC’s compliance withnotice requirements in another provision of the


statute. The court concluded that the terms “officer”and “director” would normally exclude a person likeJongebloed who had resigned his position twoyears before the relevant events whether the courtapplied the plain meaning of the terms “officer” and“director” or a technical meaning that such termsmay have acquired in the law of business entities.The court could not discern from the statutoryscheme of the lottery statute any intent on the partof the legislature to include former officers,directors, and owners among the licensee’s“officers, directors, and owners” who can be heldpersonally liable if notice of such an individual’sresignation was not provided to the Commission asrequired by a separate provision of the statute.Thus, the LLC’s failure to notify the Commission ofJongebloed’s resignation could not cause him toremain an “officer” or “director” subject to personalliability under the statute.

Harris v. Kupersmith, No.FSTCV086000995S, 2009 WL 3286108 (Conn.Super. Aug. 31, 2009) (finding allegations that LLCmember personally participated in tortious actssufficient to support claim to impose personalliability on member).

Tumosa v. Curtis, No. X07CV085023851,2009 WL 3086391 (Conn. Super. Aug. 25, 2009)(holding principle that corporate officer is personallyliable for torts committed by officer applies equallyto LLCs and individual who allegedly personallyparticipated in tortious activities was not shieldedfrom liability by provision of LLC statute that statesmember or manager is not liable for liability of LLCsolely by reason of being member or manager).

ODP, LLC v. Shelterlogic, LLC, No.X09CV064020086, 2009 WL 2783692 (Conn.Super. July 31, 2009) (holding that individuals whowere members and managers of LLC, as agents ofLLC, were shielded from liability for civil conspiracyby intracorporate conspiracy doctrine because theirconduct did not fall within “scope of employment” or“scope of agency” exception, which recognizesdistinction between collaborative acts done inpursuit of employer’s business and private actsdone by persons who happen to be at workplace).

LLC Veil Piercing

In re BH S&B Holdings LLC (OfficialCommittee of Unsecured Creditors v. BarHarbour Masters Ltd.), 420 B.R. 112 (Bankr.S.D.N.Y. 2009). This case arose out of thebankrupt Steve & Barry’s clothing stores and thesubsequent bankruptcy filing by the purchaser, BH

S&B Holdings, LLC (“Holdings”) and itssubsidiaries. The Official Committee of UnsecuredCreditors (the “Committee”) sought to recovermoney for the estate through veil piercing, breachof fiduciary duty, and equitable subordination orrecharacterization claims. Holdings was owned byanother LLC (“Holdco”), and an intermediateholding LLC (“Intermediate Holdco”) was laterinterposed between Holdings and Holdco. Theentire structure was formed and funded by YorkCapital Management (“York”), four entitiescollectively referred to as “Bay Harbour”, Steve andBarry’s co-founders (Steven Shore and BarryPrevor), and Hilco SB LLC. Among other claims,the Committee alleged that Bay Harbour’s andYork’s domination and control of Holdings viaHoldco gave rise to a veil piercing claim and thatBay Harbour, York, and individual employees ofthese entities should be liable for debts andobligations of the debtor. The court stated, and theparties agreed, that the veil piercing claims weregoverned by Delaware law since Holdings, Holdco,and most of the other entities were Delawareentities. The court discussed at length theCommittee’s veil piercing claims. Initially, the courtdiscussed how many veils must be pierced, i.e.,whether each separate entity’s veil had to bepierced or whether it was only necessary to pierceHoldings’s veil to reach Bay Harbour, York and theiremployees. The court concluded that it did not needto reach the question of whether each entity’s veilmust be separately pierced because the court foundthe Committee had not adequately pled its veilpiercing claim. The court discussed the allegationsregarding inadequate capitalization, failure toobserve corporate formalities, and whetherHoldings was a facade such that equity andfairness required piercing the veil. With respect toinadequate capitalization, the court concluded that,even assuming Holdings was inadequatelycapitalized, the complaint did not support aninference that Holdings served an illegitimatepurpose. The court stated that it is a rare instancein which the veil should be pierced because ofundercapitalization, and the circumstances herewere not unusual enough to support veil piercing.With respect to corporate formalities, the courtnoted that somewhat less emphasis is placed onformalities in the LLC context than the corporatecontext because fewer such formalities are requiredfor LLCs. The court observed that the DelawareLLC statute requires little more than a propercertificate of formation, maintenance of a registeredagent and registered office in Delaware, andmaintenance of certain records. Also, the Delawarelaw permits non-natural persons to serve asmanagers of an LLC whereas the directors of a


corporation must be natural persons. The courtstated that wholly-owned subsidiaries may shareofficers, directors, and employees with their parentwithout giving rise to an inference that thesubsidiary is a mere instrumentality. ThatHoldings’s parent retained decision-makingauthority was also insufficient to pierce the veil.Furthermore, since Holdings was an LLC, the lackof officers or a board of managers other than itsparent was not necessarily a persuasive veilpiercing factor. The court commented that theDelaware LLC statute permits members of an LLCto be other entities, thus impliedly permitting thoseentities to serve in an entity capacity in which theycontinue to owed fiduciary duties to their ownmembers. None of the allegations suggestedimpropriety or abuse of the corporate form, and thefailure to hold board meetings did not supportpiercing because Delaware law did not requireHoldings to hold board meetings or observe otherformalities. The remaining allegations (thatHoldings lacked a CEO until a few weeks before thebankruptcy filing, that CFO duties were outsourced,and that its management was kept in the dark) wereeither not required under Delaware LLC law or weretoo conclusory to survive a motion to dismiss. Insum, the Committee failed to plead adequate factssupporting an inference that Holdings’s failure toobserve corporate formalities was so severe as toovercome the presumption of independence fromits parents. Finally, the court found the allegationsinsufficient to show that Holdings was a sham andexisted as a vehicle for fraud or injustice. Again,the court emphasized the conclusory nature of theallegations, that an overlap in ownership, officers,and directors is common and permissible, and thatDelaware law permitted Holdings’s parent to be thesole manager.

Capricorn Investors III, L.P. v.CoolBrands International, Inc., 897 N.Y.S.2d 668(N.Y. Sup. 2009). The court discussed theplaintiff’s veil piercing allegations with respect totwo Delaware LLCs and concluded that the plaintiffsfailed to plead particularized facts sufficient tosustain a piercing claim. The plaintiff madeparticularized allegations of commingling anddisregard of formalities, but the court noted that theassertion that the LLCs had no officers or directorsand did not hold meetings were not persuasive veilpiercing factors where there was no allegation thatmanagement was required to be centralized in aboard. The court also stated that failure to pay anLLC tax or fee is not “undercapitalization” of theentity. The court concluded that allegationsregarding the LLCs’ lack of email address orletterhead, communications being sent to the

managing member, and overlapping ownershipconstituted a sufficient pleading of dominationfactors, but there were insufficient allegations of theuse of domination and control to perpetrate a wrongagainst the plaintiff.

Boston Scientific Corporation v. WallCardiovascular Technologies, LLC, 647F.Supp.2d 358 (D. Del. 2009) (rejecting argumentthat Texas LLC was subject to personal jurisdictionin Delaware as alter ego of Delaware LLC becauserecord did not show sufficient level of control,absence of corporate formalities, or fraud, injustice,or inequity in use of corporate form; recognizingseparate legal existence of LLC and its membersunder Texas law and rejecting argument thatpersonal jurisdiction over LLC is proper in anyforum in which LLC’s members are subject tojurisdiction).

Longhi v. Mazzoni, 914 N.E.2d 834 (Ind.App. 2009) (treating LLC and predecessorcorporation as same entity for purposes ofanalyzing conduct relating to plaintiff’s claim thatevidence was sufficient to pierce veil of LLC toimpose liability on individual who was 1% memberand manager of LLC, and finding sufficientevidence of undercapitalization of entity and use ofentity by individual to promote fraud to support trialcourt’s decision to pierce veil).

Otero v. Vito, Civil Action No. 5:07-cv-405(CAR), 2009 WL 3063426 (M.D. Ga. Sept. 22,2009). Although the undisputed evidence showedthat various entities, including numerous LLCs,were used to defeat justice and evade contractualor tort responsibilities, the court was precluded fromexercising the equitable power of piercing the veilon behalf of a creditor seeking recovery from theentities to satisfy the debt of the individual whocreated and controlled the entities because theGeorgia Supreme Court has held that reverse veilpiercing is not permitted under Georgia law. Thecourt, however, used the alter ego finding inconnection with a finding that transfers of money,real property, and personal property from theindividual to the entities were fraudulent under theGeorgia Uniform Fraudulent Transfer Act.

In re Hecker, 414 B.R. 499 (Bankr. D.Minn. 2009). The court determined that the debtorcould not use reverse veil piercing to claim ahomestead exemption in property occupied by thedebtor but owned by an LLC that was wholly ownedby another LLC in which the debtor held a majorityinterest. The debtor asked the court to disregardthe formalities and exercise the court’s equitable


power to “reverse pierce” the veil of the entities inorder to deem the debtor the owner of the propertyso that he could claim an exemption under theMinnesota statute. The court noted that Minnesotaextends the doctrine of corporate veil piercing toLLCs under the Minnesota LLC statute, and thecourt examined two prominent Minnesota reversepiercing homestead exemption cases. The courtdistinguished the debtor’s situation in this case fromthe other cases in which reverse piercing waspermitted to allow a homestead exemption becausethe companies created by the debtor were part of alarge web of interconnected businesses whereasthe two other cases examined by the court involvedfamily farmers whose only business was farming.The parent LLC was an investment businessowning over 50 properties. There was no allegationof undercapitalization, failure to observe corporateformalities, nonpayment of dividends, siphoning offunds, nonfunctioning officers and directors, orabsence of corporate records. The subsidiary LLCthat owned the debtor’s residence was formed toacquire properties, including properties for futurecommercial development, without the debtor’s wifegaining an interest in the properties. The courtconcluded that the facts did not support theconclusion that either of these LLCs was thedebtor’s alter ego. Furthermore, the court foundthat the debtor did not meet his burden ofdemonstrating that reverse piercing the veils of theLLCs would not adversely affect shareholders andcreditors. There were five other owners of theparent LLC. These owners, consisting of trusts forthe benefit of the debtor’s children and acorporation owned by the debtor, werecharacterized by the court as separate legal entitieswhose interests would be diminished in value byrecognizing a homestead exemption. Furthermore,the creditors of the LLCs and the corporate memberof the parent LLC would be adversely affected. Thecourt discussed the fact that creditors of thecorporation and the LLCs would not have expectedthat the property might be exempt as a homesteadsince the property was owned by an LLC owned byanother LLC owned by four trusts and anothercorporate entity. Furthermore, the property wasrecreational property until the eve of bankruptcywhen the debtor tried to make it his homestead.Finally, the court concluded that the debtor failed todemonstrate that it would be unfair and unjust not topierce the veil. In the other cases examined by thecourt, the parties seeking the homestead exemptionwould have been entitled to the exemption prior toincorporating, and the question was whether thedebtors lost their homestead exemption byincorporating. In this case, the property was not thedebtor’s homestead prior to formation of the LLCs,

and it was only on the eve of bankruptcy that thedebtor decided to move into the home and claim itas his homestead.

Blue Star Corporation v. CFK Properties,LLC, 980 A.2d 1270 (Me. 2009). The courtreviewed the record as it bore on the issue ofwhether the sole owner and president of an LLCwas liable as the LLC’s alter ego or based on theindividual’s own participation in wrongful acts. Thecourt applied corporate veil piercing principles as ifthe LLC were a corporation without discussing thefact that the entity was an LLC. The court foundthat there were unresolved factual issues andvacated the trial court’s summary judgment that theveil could not be pierced and that the individualcould not be held individual liable for participation inwrongful acts causing damage to the plaintiff.

Auntie Ruth’s Furry Friends’ HomeAway From Home, Ltd. v. GCC PropertyManagement, LLC, No. A08-1602, 2009 WL2926485 (Minn. App. Sept. 15, 2009) (refusing todisregard separate existence of commonly ownedcorporation and LLC for purposes of applying rightof first refusal provision of lease contract andholding that transfer of property from corporation tocommonly controlled LLC constituted sale ofproperty triggering right of first refusal).

Domestic Construction, LLC v. Bank ofAmerica, N.A., No. CV07-5357BHS, 2009 WL2853255 (W.D. Wash. Sept. 1, 2009) (recognizinglimited liability of LLC members under Washingtonlaw subject to exceptions for member’s own torts,contributions member has agreed to make, return ofwrongful distributions, and veil piercing, andconcluding numerous questions of fact regardingbusiness relationship of LLC and individual(including evidence of commingling of assets anddisrespect of corporate form) precluded summaryjudgment in favor of individual on personal liabilityissue; finding questions of fact as to whetherindividual was sole member of LLC and whetherpersonal and LLC assets were commingledprecluded court from ruling as matter of law thatindividual did not owe fiduciary duty to co-jointventurer of LLC).

Harris v. Kupersmith, No.FSTCV086000995S, 2009 WL 3286108 (Conn.Super. Aug. 31, 2009) (finding allegations of lack offormalities, use of employees and assets of LLC forpersonal purposes, and evidence of unity of interestand ownership and lack of independence weresufficient to support claim to pierce veil of LLC andhold member liable).


911 Management, LLC v. United States,657 F. Supp.2d 1186 (D. Ore. 2009) (granting IRSmotion for summary judgment on issues of whetherLLC was nominee and alter ego of LLC’s membersunder state law so as to permit IRS levy againstLLC’s bank account with respect to tax liability ofmembers).

In re Supplement Spot, LLC (Floyd v.Option One Mortgage Corporation), 409 B.R. 187(Bankr. S. D. Tex. 2009). The bankruptcy trusteebrought an action to avoid payments that weremade from an account funded by the debtor LLC’sbusiness operations. The account was styled“Marcella Ortega dba Young Again Nutrients,” andMarcella Ortega was president of the debtor LLC.The payments challenged by the trustee werepayments on mortgage debts of Ortega, and thecourt held that they were avoidable as fraudulenttransfers. In order to find that the payments werefraudulent transfers, the court had to find that theaccount was the property of the debtor LLC. Theaccount was listed as an asset of the debtor LLCand contained funds generated by the LLC’sbusiness, but the mortgage company claimed thatOrtega mistakenly turned over the account to thetrustee. The court found that the evidence wassufficient to support the finding that the account wasthe LLC’s property based on an inference drawnunder the “uncalled witness rule.” Under this rule,the fact that the mortgage company failed to callOrtega as a witness allowed an inference that hertestimony would be unfavorable to the mortgagecompany. Alternatively, the court found that theaccount was properly considered property of theLLC because the court could pierce the “individualveil” and view the account as property of the LLC.The court explained that a court may sometimes“pierce the corporate veil” to determine whether theactivities and property of a corporation should beattributed to its individual principal or principals, butstated that the court here was being asked to do theopposite– to “pierce the individual veil” and attributeproperty of Ortega to the debtor LLC. The courtnoted that courts generally protect the individualassets from the reach of a corporation’s bankruptcy,but cited the corporate alter ego doctrine as a basisto treat individual property as corporate property.The court stated that it would treat the account asproperty of the LLC because Ortega herselfdisregarded the separation between the LLC’sfunds and her funds by using the accountexclusively to pay her personal expenses when theaccount was funded exclusively by the LLC’sbusiness. Further, the court noted that injusticewould result if the account were not treated as the

property of the debtor because the fraudulenttransfers, if not avoided, would seriously hinder thetrustee’s ability to administer the bankruptcy case.

LLC Property and Interest of Members

Hinson v. M/V Chimera, 661 F. Supp.2d614 (E.D. La. 2009) (acknowledging close familyrelationship between owners of LLC that ownedvessel but questioning whether indirect sharing ofprofits from LLC interest, which occurred byoperation of community property law, alone createsjoint venture between non-member spouse andLLC, and concluding that there was insufficientevidence to create triable issue that family wasengaged in joint venture regarding vessel thatwould preclude all family members from holdingmaritime lien).

Authority of Member, Manager, or Agent

Pint v. Breckner, No. 08-CV-5340(JMR/SRN), 2009 WL 4042905 (D. Minn. Nov.19, 2009). Pint and Nelson each owned 50% of aMinnesota LLC, and Pint sought to invalidate amortgage given by Nelson to Breckner on LLCproperty in Florida. The operating agreementrequired that a mortgage be approved by 67% ofthe members, and Pint did not approve themortgage. The parties disagreed on whetherMinnesota or Florida law governed the dispute.The mortgage contained a choice of law provisionspecifying that Minnesota law governed themortgage except for procedural matters related toperfection and enforcement by the mortgagee of itsrights and remedies against the property, whichwould be governed by Florida law. The courtcharacterized the dispute as concerning the validityand rights accrued under the mortgage and, assuch, governed by Florida law. Under Florida law,the court concluded the mortgage was valid, but thecourt commented that the mortgage would havebeen valid applying Minnesota law as well. Thecourt relied on provisions of the Florida LLC statuteregarding the binding effect of a member’s acts inthe ordinary course of business. The court statedthat the mortgage appeared to be in the ordinarycourse of business of the LLC because the LLCwas a real estate investment company, and Pintfailed to show that Breckner knew Nelson lackedauthority. Breckner relied upon representations byNelson and did not know of Pint’s interest in theLLC. The court rejected the argument that themortgage failed for lack of consideration becauseFlorida law recognizes securing pre-existing thirdparty debt as sufficient consideration for amortgage, and money was loaned to Nelson. The


court also rejected the argument that Brecknershould have known about Pint’s interest andNelson’s lack of authority. The court concluded thatthere was no duty imposed on Breckner to reviewthe governing documents of the LLC, and there wasno evidence Breckner knew or had notice Nelsonlacked authority to grant a mortgage.

In re Fountainebleau Las VegasHoldings, LLC, No. 09-21481-BKC-AJC, 2009 WL3669648 (Bankr. S.D. Fla. Oct. 26, 2009)(discussing management structures of LLCs and“working down corporate trail” of various LLCs todetermine that Board of Managers of parent LLCexerted substantial control over member-managedLLC debtor subsidiaries and that principal place ofbusiness of debtors for venue purposes was Floridasince major decisions affecting debtors occurred inFlorida).

In re Beatrice Biodiesel, LLC (Lange v.Home Federal Savings Bank), Bankruptcy No.BK08-41927-TLS, Adversary No. A09-4009-TJM,2009 WL 3255087 (Bankr. D. Neb. Oct. 7, 2009).The bankruptcy trustee challenged the validity of adeed of trust signed by an individual as vice-president and secretary of the LLC borrower. Theindividual was an officer of a corporation that wasthe sole member and manager of the LLC. Thetrustee argued that the Nebraska LLC statuterequires that instruments of encumbrance beexecuted by a manager to be valid. The court heldthat the trustee’s interpretation of the statute wastoo narrow and that it was more reasonable to inferthat the statutory language was not intended todescribe the only persons authorized to obligate anLLC but rather to assure third parties that such adocument signed by a manager was in fact validand binding on the LLC. Because the manager ofthe LLC was a corporate entity that could only actthrough officers and agents, and the individual wasin fact authorized to act on behalf of the managerand the LLC in connection with the financingtransaction, the court concluded that the deed oftrust was properly executed and could not be setaside.

People v. Highgate LTC Management,LLC, 887 N.Y.S.2d 298 (App. Div. 3rd Dept. 2009).An LLC that operated a rehabilitation and extendedcare facility was convicted of various crimes basedon the failure of the LLC’s employees to providerequired care to a patient and falsification of recordsregarding such care. The court held that an LLCcan be held criminally responsible for the acts of itsemployees committed in the scope of employment.The LLC argued that the doctrine of respondeat

superior does not apply to crimes that requirespecific intent and that the statutory provision of thePenal Code making respondeat superior applicableto corporations must be strictly construed andcannot apply to unincorporated associations suchas LLCs. The court rejected these arguments,relying on case law involving corporations andunincorporated associations. Though the courtacknowledged that the Penal Code provisionapplying respondeat superior liability tocorporations is inapplicable to an LLC, the courtstated that “long-standing analogous principles thathave evolved through case law remain dispositive.”

BankPlus v. Kinwood Capital Group,L.L.C., Civil Action No. 3:08cv498 DPJ-JCS, 2009WL 3062457 (S.D. Miss. Sept. 18, 2009). The courtinterpreted the Mississippi LLC statute andconcluded that a conveyance of real property by anLLC member who lacked authority to do so wasvoid and did not pass title to a subsequent bonafide purchaser for value. Under the Mississippi LLCstatute, every member is an agent of the LLC forthe purpose of conducting its business, and the actof a member for apparently carrying on in the usualway the business of the LLC binds the LLC unlessthe member lacks authority and the person withwhom the member is dealing knows that themember has no authority. The statute furtherprovides that no act of a manager or member incontravention of a restriction on authority binds theLLC to persons with knowledge of the restriction.The member in this case was not authorized toconvey title to the LLC’s property, and he conveyedthe property to another LLC owned by him. Thus,the grantee knew the member lacked authority.The question, however, was whether a subsequentbona fide purchase obtained clear title. The courtstated that this was a question of first impression inMississippi, and the court looked to forgery casesand LLC cases outside of Mississippi for guidance.The court concluded that the legislature intended toprotect LLCs from unauthorized acts by themembers and that the conveyance by theunauthorized member was void ab initio. The courtacknowledged that its conclusion was a close calland stated that it would be tempted to certify thequestion to the Mississippi Supreme Court if it hadauthority to do so. The court further noted that theissue was well-defined and would receive de novoreview at the next stage of appeal.

Admission of Member

Domestic Construction, LLC v. Bank ofAmerica, N.A., No. CV07-5357BHS, 2009 WL2853255 (W.D. Wash. Sept. 1, 2009) (denying


LLC’s motion for summary judgment that twoindividuals were never members of LLC becausefact issue was raised by LLC’s foreign qualificationregistration in Washington naming individuals astwo of its three members).

Jongebloed v. Texas LotteryCommission, No. 03-08-00154-CV, 2009 WL2837698 (Tex. App. Aug. 31, 2009). The courtconcluded that the Texas Lottery Commission failedto establish that the appellant, Jongebloed, was an“officer, director, or owner” of an LLC licensed bythe Commission to sell lottery tickets. TheCommission relied upon Jongebloed’s status assuch to hold him personally liable under the lotterystatute for lottery sales proceeds owed to theCommission by the LLC. The LLC’s 2001 licenserenewal application filed in 2001 identifiedJongebloed as vice president of the LLC, butJongebloed argued that he was not an officer,director, or owner in 2002 when the LLC’s liabilityaccrued. He presented evidence that he severedany ties with the LLC in 2000 and that any LLCfilings to the contrary were in error. The courtreviewed the evidence and found that theCommission’s findings, on their face, did notsupport its legal conclusion that Jongebloed was amember of the LLC when the lottery proceedsbecame due. The court stated that membership inan LLC is an interest in personal property akin tostock ownership or a partnership interest. Althoughthe Commission made findings that Jongebloed hadbeen identified in LLC filings as a vice president(i.e., an officer) and manager (which the courtcharacterized as “essentially the equivalent of adirector”), the Commission made no findings that hewas ever a member. The court stated that being amanager or officer of an LLC does not mean one isalso a member. Managers and officers may, butneed not be, members, and managers and officersdo not by that status alone have a membershipinterest in the entity.

Inspection and Access to Information

In re Resource Energy Technologies,LLC, 419 B.R. 746 (W.D. Ky. 2009) (holdingdiscovery order entered in state court requiringmembers of debtor LLC to turn over documents ofLLC did not violate automatic stay becausemembers have rights to access, inspect, and copyLLC information under Kentucky law in theircapacities as members and such action is not anact to obtain possession of or exercise control overproperty of the estate).

BankPlus v. Kinwood Capital Group,L.L.C., Civil Action No. 3:08cv498 DPJ-JCS, 2009WL 3062457 (S.D. Miss. Sept. 18, 2009). The courtinterpreted the Mississippi LLC statute andconcluded that a conveyance of real property by anLLC member who lacked authority to do so wasvoid and did not pass title to a subsequent bonafide purchaser for value. Under the Mississippi LLCstatute, every member is an agent of the LLC forthe purpose of conducting its business, and the actof a member for apparently carrying on in the usualway the business of the LLC binds the LLC unlessthe member lacks authority and the person withwhom the member is dealing knows that themember has no authority. The statute furtherprovides that no act of a manager or member incontravention of a restriction on authority binds theLLC to persons with knowledge of the restriction.The member in this case was not authorized toconvey title to the LLC’s property, and he conveyedthe property to another LLC owned by him. Thus,the grantee knew the member lacked authority.The question, however, was whether a subsequentbona fide purchase obtained clear title. The courtstated that this was a question of first impression inMississippi, and the court looked to forgery casesand LLC cases outside of Mississippi for guidance.The court concluded that the legislature intended toprotect LLCs from unauthorized acts by themembers and that the conveyance by theunauthorized member was void ab initio. The courtacknowledged that its conclusion was a close calland stated that it would be tempted to certify thequestion to the Mississippi Supreme Court if it hadauthority to do so. The court further noted that theissue was well-defined and would receive de novoreview at the next stage of appeal.

Hankerson v. Hankerson ManagementCompany, No. 1 CA-CV 08-0753, 2009 WL3835290 (Ariz. App. Nov. 17, 2009). A member ofseveral LLCs made a request to inspect and copyvarious records as authorized by the LLC operatingagreements and Arizona law, and a disputedeveloped as to whether there was compliance withthe request. The court concluded that the evidencesupported the trial court’s determination that themember was given full access to the companies’books and records. Neither the operatingagreements nor Arizona law required the books andrecords to be provided in any particular format. Themember complained that he was not provided thebooks in electronic format, but there was evidencethat he was provided a compact disc with thegeneral ledgers and that the books were laterproduced in electronic format. The court also foundthat there was a reasonable basis for a


discretionary award of attorneys’ fees as authorizedby Arizona statute in an action arising out of acontract.

Abdalla v. Qadorh-Zidan, 913 N.E.2d 280(Ind. App. 2009). The Abdallas and Zidans formedfive LLCs and a corporation. Each family owned50% of each LLC, and the two families were alsothe sole directors and shareholders of thecorporation. After a dispute developed, the Zidanssold their membership interests to the Abdallas.After receiving K-1 Schedules for the year endingon the date they sold their interests, the Zidansasked to see the books of the LLCs and corporationfor the period during which they were members andshareholders. Eventually, the Zidans filed acomplaint alleging breach of fiduciary duty,negligence, and declaratory relief to inspect thebooks and records of the LLCs and corporation forthe period during which they were members of theLLCs and shareholders of the corporation. Theyalso sought discovery of the information used toprepare the K-1 Schedules. The Abdallas filed amotion for summary judgment arguing that they didnot owe the Zidans any duties in connection withthe preparation of the tax data and that the Zidanswere not entitled to inspect the companies’ books.The trial court denied the motion for summaryjudgment, and the Abdallas filed an interlocutoryappeal. The parties’ main argument focused onwhether a fiduciary duty existed between thecompanies and the former members andshareholders. The court reviewed case law in thepartnership and corporate context and concludedthat the Abdallas owed the Zidans a fiduciary dutywith respect to the period during which the Zidanswere members of the LLC and shareholders of thecorporation. To hold otherwise, said the court,would give the Abdallas the freedom to allocate taxburdens to the Zidans and retain tax benefits forthemselves without allowing the Zidans anyrecourse. The court then addressed the Abdallas’contention that the Zidans had no right of access tothe companies’ books because they were no longermembers or shareholders of the companies. Thecourt acknowledged that the statutes provided“members” and “shareholders” access to the booksand records, but emphasized that the Zidans werenot seeking access to current financial information.The court concluded that the Zidans had the right toinspect the records of the companies for the taxyear 2006, when the Zidans were still members andshareholders, in order to ensure the correctness ofthe K-1 Schedules.

Cheney v. IPD Analytics, L.L.C., No. 08-23188-CIV, 2009 WL 3806171 (S.D. Fla. Aug. 28,

2009). An LLC member with a 2.5% interest in theLLC sought summary judgment on a recordsinspection claim and asserted that he had noobligation to comply with any restrictions the LLCsought to impose before allowing access. The LLChad conditioned access to the requesteddocuments on express assurance that theinformation would not be shared with any person.The court noted that the Florida statute grantsunrestricted access to the LLC’s records but alsolimits that access by giving the manager of the LLCdiscretion to withhold such information if themanager in good faith believes such disclosure isnot in the best interest of the LLC. The LLCmember argued that there was no evidence in therecord that would support a finding that themanager of the LLC “reasonably” and in “good faith”believed disclosure of the documents would not bein the best interest of the LLC. The court statedthat a pending claim against the LLC member forbreach of his employment agreement’s non-competition clause was sufficient to create an issueof fact as to whether the manager’s actions were“reasonable” and in “good faith.”

Fiduciary Duties of Members and Managers

Vichi v. Koninklijke Philips ElectronicsN.V., Civil Action No. 2578-Vcp, 2009 WL 4345724(Del. Ch. Dec. 1, 2009). Vichi made a loan to aDelaware LLC which was a subsidiary of a jointventure between two foreign companies. The LLCwent bankrupt and defaulted on the loan to Vichi.Vichi then sued various parties. Among otherclaims, Vichi brought breach of fiduciary duty claimsagainst an individual citizen of Singapore whoresided in China and was an officer of the jointventure and employed by a subsidiary of the jointventure that was the sole member and manager ofthe LLC. The individual successfully moved fordismissal of the claims against him for lack ofpersonal jurisdiction because neither the Delawarelong-arm statute nor the implied consent provisionof the LLC statute provided a basis to exercisejurisdiction over him. However, the court stated thateven if it had not dismissed the claims against himfor lack of personal jurisdiction, it would havedismissed the breach of fiduciary duty claims forfailure to state a claim because Vichi failed toestablish that his fiduciary claims were cognizableunder Delaware law. The court stated that creditorsof a Delaware corporation that is insolvent or in thezone of insolvency have no right to assert directbreach of fiduciary claims, and the court concludedthat the same rule applies in the LLC context. Thecourt then analyzed whether Vichi’s fiduciary claimwas direct or derivative based on who suffered the


alleged harm and who would receive the benefit ofrecovery. The court found that Vichi alleged thatthe individual breached his fiduciary duty to Vichi asa creditor and that Vichi had personally suffereddamages. Moreover, Vichi’s prayer for reliefdemanded that he personally receive recompensefor the value of the notes, among other damages.The court therefore concluded that Vichi’s breach offiduciary duty claims were direct, and Vichi, as acreditor of a Delaware LLC, could not bring a directclaim for breach of fiduciary duty. Thus, Vichi hadfailed to state a claim for which relief could begranted under Delaware law with respect to hisfiduciary duty claims.

In re BH S&B Holdings LLC (OfficialCommittee of Unsecured Creditors v. BarHarbour Masters Ltd.), 420 B.R. 112 (Bankr.S.D.N.Y. 2009). This case arose out of thebankrupt Steve & Barry’s clothing stores and thesubsequent bankruptcy filing by the purchaser, BHS&B Holdings, LLC (“Holdings”) and itssubsidiaries. The Official Committee of UnsecuredCreditors (the “Committee”) sought to recovermoney for the estate through veil piercing, breachof fiduciary duty, and equitable subordination orrecharacterization claims. Holdings was owned byanother LLC (“Holdco”), and an intermediateholding LLC (“Intermediate Holdco”) was laterinterposed between Holdings and Holdco. Theentire structure was formed and funded by YorkCapital Management (“York”), four entitiescollectively referred to as “Bay Harbour”, Steve andBarry’s co-founders (Steven Shore and BarryPrevor), and Hilco SB LLC. Among other claims,the Committee alleged that Holdco as well as BayHarbour and York employees and officers ofHoldings breached their fiduciary duties toHoldings. The court stated, and the parties agreed,that the breach of fiduciary duty claims weregoverned by Delaware law since Holdings, Holdco,and most of the other entities were Delawareentities. The court concluded that the Committeefailed to sufficiently alleged breach of fiduciary dutyclaims. The court first noted that a manager of anLLC owes the traditional duties of loyalty and careto the members of an LLC under Delaware law, butparent corporations do not owe wholly-ownedsubsidiaries fiduciary duties. The court stated thatwhen directors sit on the board of a wholly-ownedsubsidiary, the fiduciary duties run to the parentrather than the subsidiary. Thus, Delaware lawdoes not embrace the concept that a director of awholly-owned subsidiary owes a duty to second-guess the judgment of its parent corporation.Further, the court noted exculpatory provisions inthe Holdco operating agreement (which exculpated

managers from liability except for acts or omissionsconstituting fraud, willful misconduct, bad faith, orgross negligence), and provisions of the Holdingsoperating agreement indemnifying the member(except for gross negligence, willful breach of theagreement, or willful violation of law). The courtstated that the Delaware LLC statute permitsprovisions eliminating or limiting liabilities to aperson who is a party to the operating agreement oris otherwise bound by the agreement, and the courtcharacterized a creditor as a person who may be“otherwise bound” by an agreement that expresslywaives fiduciary duties when the creditor steps intothe shoes of an equity holder. In this case,however, the Holdco operating agreement limitedthe Bay Harbour board manager’s fiduciary dutiesto Holdco or its unit holders to the type of fiduciaryduties of loyalty and care owed by directors andofficers of a business corporation under theDelaware General Corporation Law, necessitatingan analysis of the fiduciary obligations under thecorporate statute. The court stated that Delawarecourts have found that the standard for breach ofthe duty of care is “gross negligence” and that theexculpatory clauses thus did not eliminate the dutyof care. Even if the employees of Bay Harbour andYork owed fiduciary duties to Holdings, the courtfound the Committee’s pleadings did not adequatelyallege breaches of the duties of loyalty and care.The pleadings failed to overcome the presumptionof the business judgment rule. There was noallegation that the individuals were interested in thealleged wrongful transactions, and the Committeedid not demonstrate that the individuals failed to actin good faith, in the honest belief that the action wasin the best interest of the company, or on aninformed basis. The court found the duty of loyaltyallegations against the Bay Harbour and Yorkemployees deficient as well. With regard to the dutyof care claims against Holdings’s officers, the courtconcluded that the Committee had standing toassert the claims and that the officers may haveowed a duty to Holdings, but the Committee’spleadings failed to overcome the presumption of thebusiness judgment rule.

Moede v. Pochter, No. 07 C 1726, 2009WL 4043418 (N.D. Ill. Nov. 20, 2009). An LLCmember sued the other members for breach of theoperating agreement and violation of the IllinoisLLC statute in connection with a sale of the LLC’sproperty and demand for distributions. The courtfound the demand by one of the members thatmoney be distributed to him and certain othermembers before any moneys were paid out to othermembers “violative of his obligations” and“profoundly disturbing.” Because the member who


made the demand was a lawyer, the court found hisadvancement of his own self-interest in preferenceto that of a fellow non-manager member particularlyunacceptable. The court also found that a claimbased on violation of the Illinois LLC statute againstthe members who demanded and accepted thepreferential distribution survived summaryjudgment. The court recognized that the operatingagreement superseded the statutory provisions onvoting and distributions, but characterized the claimas one for breach of fiduciary duty by the membersreceiving the preferential distribution to the othermember. The court noted an Illinois case holdingthat non-managing members of a manager-managed LLC owe no duty to the LLC or othermembers by virtue of being members (favorablyciting criticism of the case in a footnote, butdeclining to opine on whether the case wascorrectly decided). The court stated, however, thatthe focus of the claim was the fiduciary obligationsowed under other provisions of the statute (dealingwith member-managed LLCs).

Lola Cars International Limited v. KrohnRacing, LLC, CA Nos. 4479-VCN, 4886-VCN,2009 WL 4052681 (Del. Ch. Nov. 17, 2009). LolaCars International, Ltd. (“Lola”) and Krohn Racing,LLC (“Krohn”) formed a Delaware LLC and agreedto equal representation on the governing boardalthough Lola owned a 51% interest in the LLC andKrohn held a 49% interest. Krohn appointed itsmanager, Hazell, as its director, and agreed tocontribute Hazell’s services as the LLC’s CEO.Lola brought two suits against Krohn and Hazell,and the defendants moved to dismiss both of Lola’scomplaints. Among Lola’s claims were claimsthat Hazell breached his fiduciary duties of loyaltyand care, and Krohn aided and abetted Hazell’sdisloyalty. Krohn moved to dismiss Lola’s fiduciaryclaims on the ground that Lola failed to pleaddemand futility with particularity as required by theDelaware LLC statute. The court noted that it relieson corporate precedent in interpreting thisrequirement and that demand is consideredexcused in the corporate context when allegationsin the complaint create a reason to doubt that(1) the directors are disinterested and independent,or (2) the challenged transaction was otherwise theproduct of a valid exercise of business judgment.The court denied Krohn’s motion because Lolasatisfied the particularized pleading standard byclaiming that Hazell faced a substantial risk ofliability due to his failure to maintain appropriateinventory levels and pay state taxes in a timelyfashion and his use of LLC assets for Krohn’sbenefit in violation of his duty of loyalty to the LLC.Furthermore, the court noted that where the

directors of a two-director board have equal votingpower and one is interested, demand should beexcused because that one interested director alonehas the power to preclude litigation.

In re Lawrence (Curreli v. Lawrence),Bankruptcy No. 6:08-bk-00961-ABB, Adversary No.6:08-ap-00083-ABB, 2009 WL 3486063 (Bankr.M.D. Fla. Oct. 28, 2009) (holding that fiduciaryduties of care and loyalty imposed on managingmember under Florida LLC statute did notconstitute express or technical trust required bybankruptcy law for purposes of exception todischarge provision).

Searing v. Grocki, No.X03CV084041080S, 2009 WL 3839295 (Conn.Super. Oct. 21, 2009) (stating that cases cited byplaintiffs to support claim that every member of anLLC owes a fiduciary duty to every other memberdid not adequately support their argument; holdingthat allegations of misconduct by some members ofLLC as against other members of LLC did not occurin “conduct of trade or commerce” for purposes ofConnecticut Unfair Trade Practices Act).

Junge v. Bartles, Docket No. 285035,2009 WL 3365842 (Mich. App. Oct. 20, 2009). Theplaintiff and two other individuals were each 1/3members of an LLC, and the plaintiff sued the othertwo members for conversion of his membershipinterest and oppression after the defendants gavethe plaintiff a check for his membership interest,promised him additional funds collected in thefuture, and formed another entity that took over thebusiness of the LLC. The court of appealsconcluded that the trial court erred in finding thatthe defendants converted the membership interestof the plaintiff because the plaintiff receivedcompensation for his interest in the form of a check,which he accepted, and the promise by thedefendants to pay additional amounts asreceivables were collected. The court of appealsdid not disturb the trial court’s finding of oppression,however. The Michigan LLC statute provides forvarious types of relief for a member whoestablishes that the managers or members incontrol engaged in “willfully unfair and oppressiveconduct,” i.e., a continuing course of conduct or asignificant action or series of actions thatsubstantially interferes with the interests of themember as a member. The court of appeals upheldthe trial court’s determination that plaintiff wasentitled to the equitable remedy of one-third of thebook value of the LLC based on the defendants’creation of a new entity to step into the shoes of theLLC by doing the exact same work, with the same


employees, for the same customers. The court ofappeals characterized the award as equitable reliefrather than a “money judgment” for purposes of thestatute providing for interest on money judgments.Therefore, the trial court did not err in failing toaward statutory interest.

DC Xpress, L.L.C. v. Briggs, __ S.W.3d__ 2009 WL 3199213 (Ark. App. 2009) (noting thatproof of gross negligence or willful conduct wasnecessary to hold LLC manager liable for breach offiduciary duty, commenting that chief operatingofficer’s pursuit of other business ventures did notconstitute breach of duty of loyalty where otherbusiness did not compete with or injure LLC, andfinding trial court’s failure to find for plaintiff onbreach of fiduciary duty claim against managingmember was not clearly erroneous).

Abdalla v. Qadorh-Zidan, 913 N.E.2d 280(Ind. App. 2009). The Abdallas and Zidans formedfive LLCs and a corporation. Each family owned50% of each LLC, and the two families were alsothe sole directors and shareholders of thecorporation. After a dispute developed, the Zidanssold their membership interests to the Abdallas.After receiving K-1 Schedules for the year endingon the date they sold their interests, the Zidansasked to see the books of the LLCs and corporationfor the period during which they were members andshareholders. Eventually, the Zidans filed acomplaint alleging breach of fiduciary duty,negligence, and declaratory relief to inspect thebooks and records of the LLCs and corporation forthe period during which they were members of theLLCs and shareholders of the corporation. TheAbdallas filed a motion for summary judgmentarguing that they did not owe the Zidans any dutiesin connection with the preparation of the tax dataand that the Zidans were not entitled to inspect thecompanies’ books. The trial court denied themotion for summary judgment, and the Abdallasfiled an interlocutory appeal. The parties’ mainargument focused on whether a fiduciary dutyexisted between the companies and the formermembers and shareholders. The Abdallas reliedupon the LLC operating agreements, whichprovided that a member who assigns all of hisinterest in the LLCs no longer has any rights orprivileges of a member. In addition, the Zidansacknowledged in various agreements that theywere relinquishing all of their rights, title and interestas members and shareholders. The Abdallas alsoargued that the fiduciary relationship of the Zidanswith the companies terminated when they sold theirinterests, regardless of the contractual language, inthe absence of a dissolution of the companies

because there was no winding up phase whichwould continue the existence of the duties. TheZidans acknowledged that fiduciary duties generallyterminate when a member of an LLC or shareholderof a close corporation transfers his interest, butargued that fiduciary duties remain intact withrespect to resolution of pre-separation business.They claimed that a fiduciary relationship coveredthe preparation of the tax return completed after theZidans’ involvement in the companies endedbecause the tax return addressed the period duringwhich they were members and shareholders. Thecourt noted that it had determined in a prior casethat “common law fiduciary duties, similar to onesimposed on partnerships and closely-heldcorporations, are applicable to Indiana LLCs” andthat the Indiana Supreme Court had held thatshareholders in closely-held corporations owe eachother fiduciary duties. The court characterized thequestion in this case as one of first impression, i.e.,“whether a company owes a continuing fiduciaryduty to a former shareholder or member to fairlyand accurately report the company’s financialresults to the IRS for a year in which the formershareholder held stock in the corporation or was amember of the LLC.” The court reviewed case lawin the partnership and corporate context andconcluded that the Abdallas owed the Zidans afiduciary duty with respect to the period duringwhich the Zidans were members of the LLC andshareholders of the corporation. To hold otherwise,said the court, would give the Abdallas the freedomto allocate tax burdens to the Zidans and retain taxbenefits for themselves without allowing the Zidansany recourse. The court also affirmed the trialcourt’s denial of the Abdallas’ motion for summaryjudgment on the Zidans’ negligence claim. TheAbdallas argued that the claim sounded in ordinarynegligence and that corporate directors andmembers can only be held liable in the case ofwillful misconduct or gross negligence. Becausethe Abdallas failed to proffer any summaryjudgment evidence that they did not commit willfulmisconduct or gross negligence other than a self-serving affidavit; therefore, the trial court’s denial oftheir motion was proper.

ZRII, LLC v. Wellness Acquisition Group,Inc., Civil Action No. 4374-VCP, 2009 WL 2998169(Del. Ch. Sept. 21, 2009). A Delaware LLC allegedvarious causes of action against former officers,employees, and contractors based on an allegedscheme to take over and destroy the LLC’sbusiness. The claims included breach of fiduciaryduty claims against three officers of the LLC. Thecourt stated that the individuals owed fiduciaryduties to the LLC identical to those typically owed


by a company’s directors. Further, the individualsadmitted that they owed fiduciary duties to the LLC.For purposes of the motion before the court, theissue was whether the LLC demonstrated areasonable probability of success on the merits oftheir breach of fiduciary duty claim so as to supportpreliminary injunctive relief. The court found thatthe LLC had met its burden based on evidence thatthe officers participated in a conspiracy to harm theLLC and its controlling member by misappropriatinginformation and helping employees stage a lock-outof the controlling member and other employees notinvolved in the scheme. The defendants arguedthat they were no longer constrained by loyaltyconcerns after they resigned from the LLC, but thecourt stated that the fact that they ceased to owefiduciary duties when they resigned did not meanthat the conspiracy could not continue after theirresignation and did not absolve them fromresponsibility for their own acts and those of theirco-conspirators after their resignation in furtheranceof the conspiracy.

Julian v. Julian, Civil Action No. 4137-VCP, 2009 WL 2937121 (Del. Ch. Sept. 9, 2009).Three brothers owned and operated several LLCstogether, and the plaintiff (“Gene”) sued his brothers(“Francis” and “Richard”) after he resigned as amember of several of the LLCs. Among otherclaims, asserted derivative claims for damages onbehalf of two LLCs for recovery of excessmanagement fees that were charged by themanagement company owned by Francis andRichard. The defendants argued that Gene failedto state a claim for aiding and abetting a breach offiduciary duty against Richard because the claimfailed to state a breach of fiduciary duty by Francis.The court noted that aiding and abetting a breach offiduciary duty requires (1) knowledge of the breachof a duty, and (2) participation in the wrongfulconduct. In this case, Gene alleged a breach offiduciary duty because the defendants’management company suddenly increased the feesit charged to a few of the LLCs by 400%. The courtdenied the defendants’ motion to dismiss, statingthat the allegations that Richard consented to theincrease in fees (which benefitted a companycontrolled by Richard and Francis) were sufficient tosupport a reasonable inference that Richardparticipated in the alleged wrongdoing. Finally, thecourt noted that the fact that one of the defendantscould have increased the fees on his own did notnegate a reasonable inference that the other mayhave been involved in the decision.

In re Yellowstone Mountain Club, LLC(Credit Suisse v. Official Committee of

Unsecured Creditors), 415 B.R. 769 (D. Mont.2009) (setting forth fiduciary duties of LLC membersand managers under Montana law and keepingrecord open for individual who was managingmember and controlling shareholder of controllingmember of debtor LLCs to pursue and presentadditional evidence on breach of fiduciary duty andother claims against individual).

Domestic Construction, LLC v. Bank ofAmerica, N.A., No. CV07-5357BHS, 2009 WL2853255 (W.D. Wash. Sept. 1, 2009) (findingquestions of fact as to whether individual was solemember of LLC and whether personal and LLCassets were commingled precluded court fromruling as matter of law that individual did not owefiduciary duty to co-joint venturer of LLC).

Cheney v. IPD Analytics, L.L.C., No. 08-23188-CIV, 2009 WL 3806171 (S.D. Fla. Aug. 28,2009). An LLC member with a 2.5% interest in theLLC sought summary judgment on a breach offiduciary duty claim asserted against the memberby the LLC. The member claimed that he owed noduty to the LLC as a mere employee of thecompany. The LLC argued that he owed a dutybased on his role as an agent of the company. Thecourt found no evidence in the record that themember was authorized to act on the LLC’s behalfand thus no evidence of an agency relationship.The court therefore granted summary judgment infavor of the member on the breach of fiduciary dutyclaim.

In re Supplement Spot, LLC (Floyd v.Option One Mortgage Corporation), 409 B.R. 187(Bankr. S. D. Tex. 2009). The bankruptcy trusteebrought an action to avoid payments that weremade from an account funded by the debtor LLC’sbusiness operations. The account was styled“Marcella Ortega dba Young Again Nutrients,” andMarcella Ortega was president of the debtor LLC.The payments challenged by the trustee werepayments on mortgage debts of Ortega, and thecourt held that they were avoidable as fraudulenttransfers. The court also stated that Ortega, aspresident of the LLC, had a fiduciary relationshipwith the LLC’s creditors since the LLC wasinsolvent at the time of the mortgage payments.The court relied on corporate case law for theproposition that corporate officers have fiduciaryduties to creditors when the corporation is insolvent.The court rejected the trustee’s claim for breach offiduciary duty against the mortgage company,however, because there was no evidence themortgage company knew Ortega was breaching afiduciary duty. The court stated that the transferee


of a fraudulent transfer is liable for breach offiduciary duty only where the transferee knew thetransferor was breaching a fiduciary duty. Becausethe trustee sued only the mortgage company, andnot Ortega, for breach of fiduciary duty, the trusteecould not pursue any claim for breach of fiduciaryduty.

Interpretation of Operating Agreement

Moede v. Pochter, No. 07 C 1726, 2009WL 4043418 (N.D. Ill. Nov. 20, 2009). An LLCmember sued the other members for breach of theoperating agreement and violation of the IllinoisLLC statute in connection with a sale of the LLC’sproperty and demand for distributions. The courtconcluded that one of the members did not complywith the operating agreement in approving the saleof the property, but the other members who did notknow of the transaction and did not participate inselling the property did not breach the agreement.

Prehall v. Weigel, 221 P.3d 157 (Or. App.2009). The plaintiff formed a real estatedevelopment LLC with the defendants and enteredan operating agreement providing for theirownership percentages and profit sharing inaccordance with those percentages. The partiesexecuted a second operating agreement providingfor different percentages based on the defendants’representation that the bank required thedefendants to have a greater ownershippercentage. The plaintiffs claimed that thedefendants orally agreed that the originalpercentages would be reinstated after the loan hadbeen paid. Ultimately, the parties executed a thirdoperating agreement that provided for the sameownership percentages as the second operatingagreement, but a different formula for the division ofprofits. The plaintiffs sued the defendants assertingclaims for breach of the oral agreement to reinstatetheir original ownership and profit sharingpercentages, breach of fiduciary duty, fraud, and anaccounting. The plaintiffs sought damages in anamount to be determined in an accounting andbased on the provisions of the first operatingagreement. The defendants asserted variousaffirmative defenses. The trial court denied theplaintiffs a jury trial on the basis that the reliefrequested was equitable because it in essencesought rescission of the second and third operatingagreements and an accounting. The court ofappeals analyzed the plaintiff’s claims andconcluded that they were legal and that the trialcourt erred in denying plaintiff a jury trial. The courtdid not view the requested accounting as the typethat sounds in equity, and the court rejected the

argument that the plaintiff’s claims requiredrescission of the second and third operatingagreements. The court concluded that the plaintiff’srequested remedy of damages on each of hisclaims provided adequate relief at law and made itunnecessary for the court to invoke its equityjurisdiction.

Lola Cars International Limited v. KrohnRacing, LLC, CA Nos. 4479-VCN, 4886-VCN,2009 WL 4052681 (Del. Ch. Nov. 17, 2009). LolaCars International, Ltd. (“Lola”) and Krohn Racing,LLC (“Krohn”) formed a Delaware LLC and agreedto equal representation on the governing boardalthough Lola owned a 51% interest in the LLC andKrohn held a 49% interest. Krohn appointed itsmanager, Hazell, as its director, and agreed tocontribute Hazell’s services as the LLC’s CEO.Lola brought two suits against Krohn and Hazell,and the defendants moved to dismiss both of Lola’scomplaints. Lola’s first complaint alleged that Krohnbreached the LLC operating agreement, Hazellbreached his fiduciary duties of loyalty and care,and Krohn aided and abetted Hazell’s disloyalty.Lola’s second complaint relied on a terminationclause in the operating agreement. Among therelief sought by Lola under its first complaint wasjudicial dissolution, and Krohn argued that judicialdissolution was inappropriate because theoperating agreement defined the circumstancesupon which it could be terminated, and suchcircumstances did not include judicial dissolution.Assuming that judicial dissolution as provided bystatute can be contractually eliminated, the courtconcluded that the self-termination options and lackof explicit provision for judicial dissolution in theoperating agreement did not render statutoryjudicial dissolution unavailable. The court thusdenied the defendants’ motion to dismiss the claimfor judicial dissolution. Krohn moved to dismissLola’s claim of breach of the implied covenant ofgood faith and fair dealing because the operatingagreement specifically stated that Hazell was to beCEO and that Krohn could replace him if heresigned from that position. The court agreed withKrohn that the implied covenant could not beapplied to matters covered by contract, but thecourt determined that Krohn’s refusal to evenconsider replacing him or attend board meetings todiscuss the matter allowed the court a reasonableinference of a breach of the implied covenant. In itssecond complaint, Lola sued to enforce thetermination clause in the operating agreement,which allowed a member to terminate theagreement after a breach by the other by notifyingthe breaching party of the breach and theconsequences of a failure to rectify the breach.


Under this provision of the agreement, thebreaching party had 21 days to rectify the breachbefore the non-breaching party was permitted toterminate. Lola argued that its first complaintserved as the requisite notice to Krohn and thatmore than 21 days had passed since the firstcomplaint was filed, thus entitling Lola to terminatethe agreement. Also, Lola contended that it shouldreceive the right to manage and control the LLCafter termination of the agreement because of itsmajority position. Lola requested temporary andpermanent injunctive relief prohibiting Hazell andKrohn from interfering with Lola’s control of the LLCor acting as its agents. The court denied Lola’srequest for interim injunctive relief, and refused todeclare a termination of the operating agreementbecause Lola’s first complaint did not notify Krohnof the consequences of failing to rectify the breach.Lola moved for leave to file a supplementalcomplaint, alleging that it sent Krohn a letter givingnotice that Krohn had materially breached theagreement and outlining the consequences ofKrohn’s failure to rectify its breach and that morethan 21 days had passed since the letter was sent.In the alternative, Lola asked the court to dismiss itssecond complaint without prejudice so that it couldfile a new complaint that incorporated the letter toKrohn, and the court granted this request.

Academic Imaging, LLC v. SoterionCorp., 352 Fed.Appx. 59, 2009 WL 3805807 (6th

Cir. 2009). Academic Imaging, LLC (“Academic”)and Soterion Corp. (“Soterion”) each owned a 50%interest in an LLC. After a fallout, Soterion sought abuy-out under the push-pull provisions of theoperating agreement. Soterion sent a letteroutlining the proposed terms of the buy-out, thepurchase price of which took into accountSoterion’s “unmatched additional capitalcontributions.” Academic accepted the offer, and apurchase agreement in which Soterion agreed tosell its interest to Academic was subsequentlyexecuted. After the buy-out, Academic discoveredthat Soterion had withdrawn funds from the LLCprior to the closing. Academic and the LLC filedsuit against Soterion for breach of contract,conversion, and breach of fiduciary duty. The courtconcluded that the conversion claim failed becausethe existence of a breach of contract claimprecluded asserting the same claim as a tort claimfor conversion. The court concluded that theplaintiff’s breach of fiduciary duty claim thatSoterion took advantage by misrepresentation andnon-disclosure of material facts was a claim thatcould be asserted independently of the breach ofcontract claim. Though the purchase agreementcontained an integration clause, the plaintiffs were

entitled to introduce the letter to show howSoterion’s alleged breach of fiduciary duty inducedAcademic to agree to the buy-out on Soterion’sterms. The plaintiffs also asserted a wrongfuldistribution claim on the basis that Soterionwithdrew funds contrary to the terms of theoperating agreement, but the court held that theplaintiffs could not use the letter to support itswrongful distribution claim. The plaintiffs reliedupon the letter to create a fact issue as to whetherthe disputed amount was a loan or a capitalcontribution, and the plaintiffs could not do sowithout using the letter to add a term to theunambiguous purchase agreement. The fraudexception to the parole evidence rule wasinapplicable because no misrepresentations of factwere alleged in this claim. At most, the allegedunderstanding that the funds in issue would be re-characterized as a contribution after the buy-outwas a false promise that was not written into thepurchase agreement and was also barred by theparole evidence rule. Because the plaintiffs pointedto no evidence in the record beyond the letter tosupport the contention that the repayment of thefunds in issue was contrary to the operatingagreement, there was no issue of material fact, andsummary judgment on the wrongful distributionclaim was appropriate.

St. Paul Fire and Marine InsuranceCompany v. Yang Ming (America) Corporation,C.A. No. 2:08-1623-PMD, 2009 WL 3698120(D.S.C. Nov. 3, 2009) (interpreting indemnificationprovisions of operating agreement relating tomember’s use of chassis contributed to LLC underarrangement whereby members who contributedchassis retained ownership of chassis but allmembers were entitled to use of any chassiscontributed).

Mitchell Company, Inc. v. Campus, CivilAction No. 08-0342-KD-C, 2009 WL 3527744 (S.D.Ala. Oct. 23, 2009) (interpreting withdrawal andbuyout provisions of LLC agreements, finding LLCswere bound by valuation reached by appraiserchosen by LLCs pursuant to terms of agreementafter LLC and withdrawn member were unable toagree on fair value, and granting withdrawnmember specific performance of agreement).

JD Factors, LLC v. Freightco, LLC,Cause No. 1:09-CV-95, 2009 WL 3401965 (N.D.Ind. Oct. 16, 2009). The defendant LLC sought toamend its answer in a collection suit to assert that amember’s bankruptcy resulted in his dissociationand termination as vice-president and that hisremaining rights as a member or former member


now belonged to his bankruptcy trustee. Theplaintiff argued that the defendant should be deniedleave to amend on the basis that the proposedamendment was contrary to law. The plaintiffargued that the amended allegations violated theautomatic stay provisions and were premised on anipso facto clause prohibited by Section 365(e)(1).The court rejected the plaintiff’s arguments, notingthat the bankrupt member’s services as vice-president may well be more akin to a personalservices contract than an executory contract that isfreely assignable to the trustee. The court statedthat the plaintiff did not cite any authority for itsassertion that service as an officer of a companyrises to the level of “property” of the bankruptcyestate. The court found it reasonable to infer thatthe member’s termination as vice-president did notviolate the automatic stay. Additionally, the courtstated that the ipso facto clause in the operatingagreement was not necessarily unenforceablegiven that the Indiana LLC statute provides that noperson can become a member without the consentof all members unless otherwise provided in theoperating agreement. In any event, the plaintiff didnot challenge the statement in the proposedamendment that the bankrupt member’s remainingrights as a member inure to the bankruptcy trustee.Thus, the court concluded that the proposedamendment was not “contrary to law” and that leaveto amend should be granted.

Herschend v. Hill, No. 07-3426-CV-S-ODS, 2009 WL 3230620 (W.D. Mo. Oct. 1, 2009)(discussing effect of jury verdict and finding thatoperating agreement and letters pertaining to buy-sell provision were intertwined and constituted onecontract, that plaintiffs were entitled to only onerecovery of damages related to two allegedbreaches, and that plaintiffs were not entitled todeclaratory judgment on issue submitted byplaintiffs and lost).

Abdalla v. Qadorh-Zidan, 913 N.E.2d 280(Ind. App. 2009). The Abdallas and Zidans formedfive LLCs and a corporation. Each family owned50% of each LLC, and the two families were alsothe sole directors and shareholders of thecorporation. After a dispute developed, the Zidanssold their membership interests to the Abdallas.After receiving K-1 Schedules for the year endingon the date they sold their interests, the Zidansasked to see the books of the LLCs and corporationfor the period during which they were members andshareholders. Eventually, the Zidans filed acomplaint alleging breach of fiduciary duty,negligence, and declaratory relief to inspect thebooks and records of the LLCs and corporation for

the period during which they were members of theLLCs and shareholders of the corporation. TheAbdallas filed a motion for summary judgmentarguing that they did not owe the Zidans any dutiesin connection with the preparation of the tax dataand that the Zidans were not entitled to inspect thecompanies’ books. The trial court denied themotion for summary judgment, and the Abdallasfiled an interlocutory appeal. The parties’ mainargument focused on whether a fiduciary dutyexisted between the companies and the formermembers and shareholders. The Abdallas reliedupon the LLC operating agreements, whichprovided that a member who assigns all of hisinterest in the LLCs no longer has any rights orprivileges of a member. In addition, the Zidansacknowledged in various agreements that theywere relinquishing all of their rights, title and interestas members and shareholders. The Abdallas alsoargued that the fiduciary relationship of the Zidanswith the companies terminated when they sold theirinterests, regardless of the contractual language, inthe absence of a dissolution of the companiesbecause there was no winding up phase whichwould continue the existence of the duties. Thecourt reviewed case law in the partnership andcorporate context and concluded that the Abdallasowed the Zidans a fiduciary duty with respect to theperiod during which the Zidans were members ofthe LLC and shareholders of the corporation. Tohold otherwise, said the court, would give theAbdallas the freedom to allocate tax burdens to theZidans and retain tax benefits for themselveswithout allowing the Zidans any recourse. The courtthen concluded that the Zidans had the right toinspect the records of the companies for the taxyear 2006, when the Zidans were still members andshareholders, in order to ensure the correctness ofthe K-1 Schedules.

Julian v. Julian, Civil Action No. 4137-VCP, 2009 WL 2937121 (Del. Ch. Sept. 9, 2009).Three brothers owned and operated several LLCstogether, and the plaintiff (“Gene”) sued his brothers(“Francis” and “Richard”) after he resigned as amember of several of the LLCs. The case involvedtwo different versions of Section 18-603 of theDelaware Limited Liability Company Act. For LLCagreements entered into before July 31, 1996, thestatute permitted a member to resign with sixmonths’ notice. For LLC agreements entered intoafter July 31, 1996, the statute prohibits resignationbefore dissolution and winding up unless the LLCagreement states otherwise. Gene sought anaward of fair value for his interest in the pre-1996LLCs and an award of fair value for Gene’s interestin the post-1996 LLCs, but Gene ultimately


conceded that the claims for fair value of theinterests in the post-1996 LLCs should be pursuedin arbitration. The defendants moved to dismiss thefair value claims on the basis that they were subjectto arbitration, and the court granted the defendants’motion to dismiss the fair value claims against theremaining pre-1996 LLCs because arbitration wasappropriate. The court divided the arbitrabilityquestion into “procedural” and “substantive”arbitrability relying on James & Jackson, LLC v.Willie Gary, LLC. The procedural arbitrabilityquestion revolved around whether or not the partiescomplied with the arbitration provisions of the LLCagreement. A presumption exists that proceduralarbitrability questions are answered by arbitrators,not by the courts. The court noted that substantivearbitrability was less clear-cut and included adetermination of both the scope of an arbitrationprovision and the broader issues of whether thecontract and/or the arbitration clause were valid andenforceable. The court relied upon a recentchancery court opinion for the proposition that thecourt must first address the question of whodecides whether the parties agreed to submit aparticular dispute to arbitration or to a court.According to that decision, courts presume theparties did not intend to arbitrate arbitrability unlessthere is clear and unmistakable evidence to thecontrary. Clear and unmistakable evidence that theparties intended to arbitrate arbitrability exists if thearbitration clause: (1) generally refers all disputes toarbitration, and (2) references a set of arbitral rulesthat empowers arbitrators to decide arbitrability.The arbitration clause in the present case statedthat any controversy “arising out of or relating to”the agreement shall be settled by arbitration. Thecourt interpreted “arising out of or relating to”broadly, and found the arbitration clause sufficientto satisfy the first prong of the test by generallyreferring all disputes to arbitration. The provisionalso satisfied the second prong by requiring that thearbitration be conducted in accordance with therules of the American Arbitration Association. Geneargued that his request for an award of fair valuewas based on Section 18-604 of the LLC statuteand not the LLC agreement. He further argued thatthe breach of fiduciary duty claims did not arise outof the LLC agreements because the agreementswere “bare bones.” Gene relied on Parfi HoldingAB v. Mirror Image Internet, Inc. for the propositionthat “actions do not touch matters implicated in acontract if the independent cause of action could bebrought had the parties not signed a contract.”Essentially, Gene asked the court to decidewhether his claims arose out of, or related to, theLLC agreements. The court found that if itanswered that question, it would undermine the

Willie Gary test. Although the court admitted thatcommon sense required some minor inquiry intowhether the arbitration clause covered theunderlying dispute, it said that, if there was acolorable basis that the dispute is covered by thearbitration clause and the clause satisfies the WillieGary test, then the question of substantivearbitrability should be answered by the arbitratorrather than the court. The court decided that sinceLLCs were creatures of contract, Gene’s request forfair value of his interest was, to some degree,related to the existence of the agreement and itsterms. Finally, the court noted that the policy of thecourt was to defer to arbitration when in doubt.

Googla Home Decor LLC v. Uzkiy, No.09-CV-1049 (CPS)(RML), 2009 WL 2922845(E.D.N.Y. Sept. 8, 2009) (holding arbitration clausein LLC operating agreement employing “arising outof or relating to” language was broad clausecreating presumption of arbitrability, and concludingarbitration clause encompassed breach of fiduciaryduty claim as well as disputes concerning whoexercised majority control and had authority underoperating agreement to take certain acts).

Transfer of Interest; Buy-Out of Member


Cir. 2009). Academic Imaging, LLC (“Academic”)and Soterion Corp. (“Soterion”) each owned a 50%interest in an LLC. After a fallout, Soterion sought abuy-out under the push-pull provisions of theoperating agreement. Soterion sent a letteroutlining the proposed terms of the buy-out, thepurchase price of which took into accountSoterion’s “unmatched additional capitalcontributions.” Academic accepted the offer, and apurchase agreement in which Soterion agreed tosell its interest to Academic was subsequentlyexecuted. After the buy-out, Academic discoveredthat Soterion had withdrawn funds from the LLCprior to the closing. Academic and the LLC filedsuit against Soterion for breach of contract,conversion, and breach of fiduciary duty. The courtconcluded that the conversion claim failed becausethe existence of a breach of contract claimprecluded asserting the same claim as a tort claimfor conversion. The court concluded that theplaintiff’s breach of fiduciary duty claim thatSoterion took advantage by misrepresentation andnon-disclosure of material facts was a claim thatcould be asserted independently of the breach ofcontract claim. Though the purchase agreementcontained an integration clause, the plaintiffs wereentitled to introduce the letter to show how


Soterion’s alleged breach of fiduciary duty inducedAcademic to agree to the buy-out on Soterion’sterms. The plaintiffs also asserted a wrongfuldistribution claim on the basis that Soterionwithdrew funds contrary to the terms of theoperating agreement, but the court held that theplaintiffs could not use the letter to support itswrongful distribution claim. The plaintiffs reliedupon the letter to create a fact issue as to whetherthe disputed amount was a loan or a capitalcontribution, and the plaintiffs could not do sowithout using the letter to add a term to theunambiguous purchase agreement. The fraudexception to the parole evidence rule wasinapplicable because no misrepresentations of factwere alleged in this claim. At most, the allegedunderstanding that the funds in issue would be re-characterized as a contribution after the buy-outwas a false promise that was not written into thepurchase agreement and was also barred by theparole evidence rule. Because the plaintiffs pointedto no evidence in the record beyond the letter tosupport the contention that the repayment of thefunds in issue was contrary to the operatingagreement, there was no issue of material fact, andsummary judgment on the wrongful distributionclaim was appropriate.


Junge v. Bartles, Docket No. 285035,2009 WL 3365842 (Mich. App. Oct. 20, 2009). Theplaintiff and two other individuals were each 1/3members of an LLC, and the plaintiff sued the othertwo members for conversion of his membershipinterest and oppression after the defendants gavethe plaintiff a check for his membership interest,promised him additional funds collected in thefuture, and formed another entity that took over thebusiness of the LLC. The court of appealsconcluded that the trial court erred in finding thatthe defendants converted the membership interestof the plaintiff because the plaintiff receivedcompensation for his interest in the form of a check,which he accepted, and the promise by thedefendants to pay additional amounts asreceivables were collected. The court of appealsdid not disturb the trial court’s finding of oppression,however. The Michigan LLC statute provides for

various types of relief for a member whoestablishes that the managers or members incontrol engaged in “willfully unfair and oppressiveconduct,” i.e., a continuing course of conduct or asignificant action or series of actions thatsubstantially interferes with the interests of themember as a member. The court of appeals upheldthe trial court’s determination that plaintiff wasentitled to the equitable remedy of one-third of thebook value of the LLC based on the defendants’creation of a new entity to step into the shoes of theLLC by doing the exact same work, with the sameemployees, for the same customers. The court ofappeals characterized the award as equitable reliefrather than a “money judgment” for purposes of thestatute providing for interest on money judgments.Therefore, the trial court did not err in failing toaward statutory interest.

Herschend v. Hill, No. 07-3426-CV-S-ODS, 2009 WL 3230620 (W.D. Mo. Oct. 1, 2009)(discussing effect of jury verdict and finding thatoperating agreement and letters pertaining to buy-sell provision were intertwined and constituted onecontract, that plaintiffs were entitled to only onerecovery of damages related to two allegedbreaches, and that plaintiffs were not entitled todeclaratory judgment on issue submitted byplaintiffs and lost).

Julian v. Julian, Civil Action No. 4137-VCP, 2009 WL 2937121 (Del. Ch. Sept. 9, 2009).Three brothers owned and operated several LLCstogether, and the plaintiff (“Gene”) sued his brothers(“Francis” and “Richard”) after he resigned as amember of several of the LLCs. The case involvedtwo different versions of Section 18-603 of theDelaware Limited Liability Company Act. For LLCagreements entered into before July 31, 1996, thestatute permitted a member to resign with sixmonths’ notice. For LLC agreements entered intoafter July 31, 1996, the statute prohibits resignationbefore dissolution and winding up unless the LLCagreement states otherwise. Gene sought anaward of fair value for his interest in the pre-1996and post-1996 LLCs, but Gene ultimately concededthat the claims for fair value of the interests in thepost-1996 LLCs should be pursued in arbitration.The defendants moved to dismiss the fair valueclaims against one LLC on the basis that the claimswere not ripe and against the remaining three LLCson the basis that they were subject to arbitration.With respect to ripeness, the defendants reliedupon the fact that Gene filed his fair value claimonly two days after his resignation from the LLC.The Delaware LLC statute provides an LLC a“reasonable” time after resignation of a member to


determine and distribute the resigning member’sLLC interest. The court denied the defendants’motion to dismiss for lack of ripeness because itwas reasonable to infer that the members would nothave agreed on the value of the businessregardless of how long the plaintiff waited to file suitin view of the fact that the family members wereengaged in litigation regarding valuation and otherbusiness issues. Also, the court noted that thetiming of the commencement of the suit was notcritical when the valuation was based on facts asthey existed at the time of the member’sresignation. Finally, the court noted that dismissingthe claim would be inefficient because Gene couldsimply re-file the action the next day. With respectto the arbitration issue, the court ultimately grantedthe defendants’ motion to dismiss the fair valueclaims against the remaining pre-1996 LLCsbecause arbitration was appropriate.

Improper Distributions

Moede v. Pochter, No. 07 C 1726, 2009WL 4043418 (N.D. Ill. Nov. 20, 2009). An LLCmember sued the other members for breach of theoperating agreement and violation of the IllinoisLLC statute in connection with a sale of the LLC’sproperty and demand for distributions. The courtfound the demand by one of the members thatmoney be distributed to him and certain othermembers before any moneys were paid out to othermembers “violative of his obligations” and“profoundly disturbing.” Because the member whomade the demand was a lawyer, the court found hisadvancement of his own self-interest in preferenceto that of a fellow non-manager member particularlyunacceptable. The court also found that a claimbased on violation of the Illinois LLC statute againstthe members who demanded and accepted thepreferential distribution survived summaryjudgment. The court recognized that the operatingagreement superseded the statutory provisions onvoting and distributions, but characterized the claimas one for breach of fiduciary duty by the membersreceiving the preferential distribution to the othermember.


Cir. 2009). Academic Imaging, LLC (“Academic”)and Soterion Corp. (“Soterion”) each owned a 50%interest in an LLC. After a fallout, Soterion sought abuy-out under the push-pull provisions of theoperating agreement. Soterion sent a letteroutlining the proposed terms of the buy-out, thepurchase price of which took into accountSoterion’s “unmatched additional capital

contributions.” Academic accepted the offer, and apurchase agreement in which Soterion agreed tosell its interest to Academic was subsequentlyexecuted. After the buy-out, Academic discoveredthat Soterion had withdrawn funds from the LLCprior to the closing. Among other claims, theplaintiffs asserted a wrongful distribution claim onthe basis that Soterion withdrew funds contrary tothe terms of the operating agreement, but the courtheld that the plaintiffs could not use the letter tosupport its wrongful distribution claim. The plaintiffsrelied upon the letter to create a fact issue as towhether the disputed amount was a loan or acapital contribution, and the plaintiffs could not doso without using the letter to add a term to theunambiguous purchase agreement. The fraudexception to the parole evidence rule wasinapplicable because no misrepresentations of factwere alleged in this claim. At most, the allegedunderstanding that the funds in issue would be re-characterized as a contribution after the buy-outwas a false promise that was not written into thepurchase agreement and was also barred by theparole evidence rule. Because the plaintiffs pointedto no evidence in the record beyond the letter tosupport the contention that the repayment of thefunds in issue was contrary to the operatingagreement, there was no issue of material fact, andsummary judgment on the wrongful distributionclaim was appropriate.

Pryor v. Tavana, No. HHDCV074028579,2009 WL 4069567 (Conn. Super. Oct. 30, 2009)(finding weekly payments to LLC members were innature of ownership draws rather than salary orwages where payments were frequently made toone member’s wife and tax records showedpayments as ownership draw, and excess paid toone member was thus required to be repaid toequalize distributions during dissolution).

Withdrawal, Expulsion, or Termination ofMember


JD Factors, LLC v. Freightco, LLC,Cause No. 1:09-CV-95, 2009 WL 3401965 (N.D.Ind. Oct. 16, 2009). The defendant LLC sought to


amend its answer in a collection suit to assert that amember’s bankruptcy resulted in his dissociationand termination as vice-president and that hisremaining rights as a member or former membernow belonged to his bankruptcy trustee. Theplaintiff argued that the defendant should be deniedleave to amend on the basis that the proposedamendment was contrary to law. The plaintiffargued that the amended allegations violated theautomatic stay provisions and were premised on anipso facto clause prohibited by Section 365(e)(1).The court rejected the plaintiff’s arguments, notingthat the bankrupt member’s services as vice-president may well be more akin to a personalservices contract than an executory contract that isfreely assignable to the trustee. The court statedthat the plaintiff did not cite any authority for itsassertion that service as an officer of a companyrises to the level of “property” of the bankruptcyestate. The court found it reasonable to infer thatthe member’s termination as vice-president did notviolate the automatic stay. Additionally, the courtstated that the ipso facto clause in the operatingagreement was not necessarily unenforceablegiven that the Indiana LLC statute provides that noperson can become a member without the consentof all members unless otherwise provided in theoperating agreement. In any event, the plaintiff didnot challenge the statement in the proposedamendment that the bankrupt member’s remainingrights as a member inure to the bankruptcy trustee.Thus, the court concluded that the proposedamendment was not “contrary to law” and that leaveto amend should be granted.

Choice Hotels Int’l, Inc. v. Columbus-Hunt Park Dr. BNK Investors, L.L.C., C.A. No.4353-VCP, 2009 WL 3335332 (Del. Ch. Oct. 15,2009). The defendants sought a stay of thisproceeding in which the plaintiff, Choice HotelsInternational, Inc. (“Choice”), sought adetermination, under Section 18-110 of theDelaware LLC statute, of the rightful manager of asingle purpose Delaware LLC owning property inOhio. Choice asserted that it validly removed Kleinfrom his position as the sole manager of the LLCand that Choice was the manager of the LLC. Intwo separate suits filed in Maryland, Choice suedthe LLC and Klein, and the LLC and Klein suedChoice. These suits related to loans from Choice toKlein pursuant to which Klein pledged his interest inthe LLC as security for the loans. Klein allegedlydefaulted on the loans, and Choice purported toforeclose on Klein’s membership interest in theLLC, remove Klein as the manager of the LLC, andappoint itself as the replacement manager. Choicecontended that the statutory policy behind a

summary action under Section 18-110 of theDelaware LLC statute superseded application of theconventional McWane analysis giving preference toa first-filed action and that Section 18-110 requiredthe court to give precedence to the summaryDelaware action. Section 18-110 provides that theCourt of Chancery “may hear and determine thevalidity of any admission, election, appointment,removal or resignation of a manager of a limitedliability company, and . . . may determine theperson or persons entitled to serve asmanagers . . . .” The court noted that the purposeof Section 18-110 is “to expeditiously resolveuncertainty” within an LLC. Thus, the Court ofChancery will ordinarily deny a motion to stay aSection 18-110 action. However, citing Delawareprecedent, the court acknowledged that when facedwith a request to stay a summary action, the courtbalances the McWane policies of comity andpromotion of the efficient administration of justiceagainst the policies underlying the summary natureof the Delaware action. Under the McWanedoctrine, an action will be stayed if the followingthree questions are answered in the affirmative: (1)whether there is a prior action pending elsewhererelated to the action in Delaware; (2) whether suchother suit involves the same parties and issues; and(3) whether the foreign court is capable of doingprompt and complete justice. The court answeredeach of these questions in the affirmative andfurther found that there was a significant risk thatproceeding with the Delaware action wouldunnecessarily waste time, effort, and expense orresult in inconsistent and conflicting rulings. Thecourt thus held that the McWane policies of comityand the orderly and efficient administration ofjustice supported granting a stay of the Delawareaction. The court next considered whether thebalance of potential harms weighed in favor ofstaying or not staying the action. The court notedthat the LLC had just one asset, and that the LLCcould be expected to maintain its business as usualduring the Maryland action. Thus, the courtconcluded that, under the circumstances, the first-filed rule applied and principles of comity andpromoting the efficient administration of justicerequired that the Delaware action be stayed.

Julian v. Julian, Civil Action No. 4137-VCP, 2009 WL 2937121 (Del. Ch. Sept. 9, 2009).Three brothers owned and operated several LLCstogether, and the plaintiff (“Gene”) sued his brothers(“Francis” and “Richard”) after he resigned as amember of several of the LLCs. The case involvedtwo different versions of Section 18-603 of theDelaware Limited Liability Company Act. For LLCagreements entered into before July 31, 1996, the


statute permitted a member to resign with sixmonths’ notice. For LLC agreements entered intoafter July 31, 1996, the statute prohibits resignationbefore dissolution and winding up unless the LLCagreement states otherwise. Gene sought anaward of fair value for his interest in the four pre-1996 LLCs and an award of fair value for Gene’sinterest in the three post-1996 LLCs, but Geneultimately conceded that the claims for fair value ofthe interests in the post-1996 LLCs should bepursued in arbitration. The defendants moved todismiss the fair value claims against one LLC onthe basis that the claims were not ripe and againstthe remaining three LLCs on the basis that theywere subject to arbitration. With respect to ripeness,the defendants relied upon the fact that Gene filedhis fair value claim only two days after hisresignation from the LLC. The Delaware LLCstatute provides an LLC a “reasonable” time afterresignation of a member to determine and distributethe resigning member’s LLC interest. The courtdenied the defendants’ motion to dismiss for lack ofripeness because it was reasonable to infer that themembers would not have agreed on the value ofthe business regardless of how long the plaintiffwaited to file suit in view of the fact that the familymembers were engaged in litigation regardingvaluation and other business issues. Also, thecourt noted that the timing of the commencement ofthe suit was not critical when the valuation wasbased on facts as they existed at the time of themember’s resignation. Finally, the court noted thatdismissing the claim would be inefficient becauseGene could simply re-file the action the next day.With respect to the arbitration issue, the courtultimately granted the defendants’ motion to dismissthe fair value claims against the remaining threepre-1996 LLCs because arbitration wasappropriate.

Winding Up

Glen Seed Ltd. v. Vannet, No. 09-cv-309-slc, 2009 WL 3712663 (W.D. Wis. Nov. 4, 2009)(recognizing that Wisconsin law provides thatdissolved LLC continues until winding up iscompleted and concluding that licensing contractswith LLC whose affairs had not been wound up stillexisted notwithstanding that articles of dissolutionhad been filed for LLC).

Naples v. Olin, 887 N.Y.S.2d 378 (App.Div. 3rd Dept. 2009) (holding that respondentmember’s filing of articles of dissolution did notprevent petitioner member’s continued performanceunder operating agreement and entitle petitionermember to additional compensation where

petitioner member commenced proceeding to windup affairs of LLC and thus implicitly conceded thatdissolution had occurred).

Judicial or Administrative Dissolution

Lola Cars International Limited v. KrohnRacing, LLC, CA Nos. 4479-VCN, 4886-VCN,2009 WL 4052681 (Del. Ch. Nov. 17, 2009). LolaCars International, Ltd. (“Lola”) and Krohn Racing,LLC (“Krohn”) formed a Delaware LLC and agreedto equal representation on the governing boardalthough Lola owned a 51% interest in the LLC andKrohn held a 49% interest. Krohn appointed itsmanager, Hazell, as its director, and agreed tocontribute Hazell’s services as the LLC’s CEO.Lola brought two suits against Krohn and Hazell,and the defendants moved to dismiss both of Lola’scomplaints. Lola’s first complaint alleged that Krohnbreached the LLC operating agreement, Hazellbreached his fiduciary duties of loyalty and care,and Krohn aided and abetted Hazell’s disloyalty.Lola sought the following relief: (1) dissolution ofthe LLC and appointment of a liquidating receiver;(2) an injunction to prohibit the LLC from takingaction outside the ordinary course of business; and(3) damages against Krohn and Hazell. Krohnargued that the LLC should not be dissolved underthe Delaware LLC statute because the facts allegedby Lola could not support a finding that it was “notreasonably practicable to carry on the business” ofthe LLC. Krohn interpreted the reasonablepracticability standard to mean that the businesshad been abandoned or its purpose was not beingpursued. The court rejected this interpretation andapplied the test from Fisk Ventures, LLC v. Segal,under which the court considers the followingfactors: (1) whether the members’ vote isdeadlocked at the board level; (2) whether thereexists a mechanism within the operating agreementto resolve the deadlock; and (3) whether there isstill a business to operate based on the company’sfinancial condition. The court found all three Fiskfactors were at issue in this case. First, Lola andKrohn were deadlocked over whether to replaceHazell as CEO. Second, although the operatingagreement contained a buy-out provision in event ofa member dispute, it was entirely voluntary. Third,there was serious doubt as to whether the LLCcould continue in light of its financial conditionbecause Lola had been providing significantadditional capital to keep the LLC running.Additionally, Lola’s claims of Hazell’smismanagement and disloyalty, together with theLLC’s poor performance and Hazell’s apparententrenchment, supported the reasonable conclusionthat dissolution may be appropriate. Krohn also


argued that judicial dissolution was inappropriatebecause the operating agreement defined thecircumstances upon which it could be terminated,and such circumstances did not include judicialdissolution. Assuming that judicial dissolution asprovided by statute can be contractually eliminated,the court concluded that the self-termination optionsand lack of explicit provision for judicial dissolutionin the operating agreement did not render statutoryjudicial dissolution unavailable. The court thusdenied the defendants’ motion to dismiss the claimfor judicial dissolution.

Pryor v. Tavana, No. HHDCV074028579,2009 WL 4069567 (Conn. Super. Oct. 30, 2009)(finding grounds for judicial dissolution of LLCbecause it had essentially ceased operations).

Naples v. Olin, 887 N.Y.S.2d 378 (App.Div. 3rd Dept. 2009) (holding that respondentmember’s filing of articles of dissolution did notprevent petitioner member’s continued performanceunder operating agreement and entitle petitionermember to additional compensation wherepetitioner member commenced proceeding to windup affairs of LLC and thus implicitly conceded thatdissolution had occurred).

Saunders v. Firtel, 978 A.2d 487 (Conn.2009). The court held that the trial court’s order ofjudicial dissolution of an LLC based on an impliedfinding that it was not reasonably practicable for thetwo members to carry on the business was well-supported by the evidence where the two memberseach owned 50% of the LLC, the defendantmember unilaterally lowered the rent payments forthe property owned by the LLC, the defendantmember arranged a loan from the LLC to acompany controlled by the defendant member, thedefendant unilaterally authorized certainexpenditures, the defendant did not equallycompensate the plaintiff for distributions from theLLC, and the members had ceased to have anybusiness or personal relationship. The trial courtalso found that the members made accusationsagainst each other of theft, breach of fiduciary duty,larceny, and other improper and criminal conduct.The court stated that such ill will was not conduciveto a working business relationship and furthersupported the conclusion that it was not reasonablypracticable for the members to carry on thebusiness of the LLC.

Foreign LLCs - Failure to Qualify to TransactBusiness

CACV of Colorado, LLC v. Hillman, No.14-09-18, 2009 WL 4263330 (Ohio App. Nov. 30,2009) (remanding for determination of whetherforeign LLC was registered to transact business asrequired to maintain action in Ohio court).

DB Land Holdings, L.L.C. v. Town ofFredonia, No. 1 CA-CV 08-0797, 2009 WL3878296 (Ariz. App. Nov. 19, 2009) (holding foreignLLC had standing to appeal, although it was notregistered to transact business in Arizona when itscomplaint and appeal were filed, where LLCregistered and cured any defect regarding standingto maintain its appeal).

Mobilevision Medical Imaging Services, LLC v.Sinai Diagnostic & Interventional Radiology,P.C., 885 N.Y.S.2d 631 (App. Div. 2d Dept. 2009)(holding lower court’s action staying proceeding for45 days to afford LLC opportunity to comply withforeign qualification requirement was properbecause case law interpreting foreign qualificationprovision in corporate statute supported contentionthat LLC was entitled to reasonably opportunity tocure noncompliance with foreign qualificationrequirement before dismissal of proceeding).

LVNV Funding, LLC v. Boyles, __ So.3d__, 2009 WL 3415306 (Ala. Civ. App. 2009)(holding that Delaware LLC’s failure to register todo business in Alabama did not relieve plaintiff ofcomplying with requirements set forth in ruleregarding service of process on LLC).

Foreign LLCs - Governing Law

In re BH S&B Holdings LLC (OfficialCommittee of Unsecured Creditors v. BarHarbour Masters Ltd.), 420 B.R. 112 (Bankr.S.D.N.Y. 2009) (stating that veil piercing andbreach of fiduciary duty claims involving DelawareLLCs were governed by Delaware law).

Pint v. Breckner, No. 08-CV-5340(JMR/SRN), 2009 WL 4042905 (D. Minn. Nov.19, 2009) (acknowledging that Minnesota lawgoverned internal affairs of Minnesota LLC;analyzing choice of law provision in mortgageexecuted by LLC member whose authority to do sowas disputed and concluding Florida law governeddispute where mortgage choice of law provisionspecified that Minnesota law governed mortgageexcept for procedural matters related to perfectionand enforcement by mortgagee of its rights andremedies against the property, which would begoverned by Florida law).


Charging Order

Olmstead v. Federal Trade Commission,__ So.3d __, 2010 WL 2518106 (Fla. 2010). TheFlorida Supreme Court answered a certifiedquestion from the Eleventh Circuit Court of Appealsregarding the rights of a judgment creditor of asingle member LLC and concluded that the FloridaLLC charging order statute does not preclude ajudgment creditor from using the remedy ofexecution on the interest of a single member of anLLC to reach all of the member’s right, title, andinterest in the LLC. The court reviewed theconcepts of membership, a membership interest,assignment, and the charging order under theFlorida LLC statute and concluded that theassignee of a single member of an LLC becomes amember without the consent of anyone other thanthe transferor member because the set of “allmembers other than the member assigning theinterest” (whose consent is required under thestatute to admit an assignee of a member) is empty.The court then concluded that the charging orderremedy is not the exclusive remedy of a judgmentcreditor of an LLC member because the chargingorder provision does not state that the chargingorder is the exclusive remedy, in contrast to theFlorida general and limited partnership statutes,which explicitly provide that the charging order isthe exclusive remedy by which a judgment debtorof a partner may satisfy a judgment out of thejudgment debtor’s interest. The court noted thatthere is a general execution provision in Florida thatapplies to various forms of real and personalproperty, including “stock in corporations,” and thecourt stated that an LLC is a type of corporate entitythe ownership interests of which can reasonably beunderstood to fall within the scope of “corporatestock.” The appellant judgment debtors did notcontend that the execution statute did not by itsterms extend to an ownership interest in an LLC orthat the challenged order did not comport with therequirements of the execution statute. They reliedonly upon the exclusivity of the charging orderprovision. Because the court concluded that therewas no basis to infer that the charging order statuteprovides the sole remedy for a judgment creditoragainst a judgment debtor’s interest in a singlemember LLC, it does not displace the generalexecution remedy with respect to such an interest.Thus, the court held that a court may order ajudgment debtor to surrender all right, title, andinterest in the debtor’s single member LLC to satisfya judgment. A strenuous and lengthy dissenting

opinion argued that the majority rewrote the LLCstatute and rendered the assets of all LLCs inFlorida vulnerable because the majority’s reasoningapplied with equal force to multi-member LLCs.

Accounting

Prehall v. Weigel, 221 P.3d 157 (Or. App.2009). The plaintiff formed a real estatedevelopment LLC with the defendants and enteredan operating agreement providing for theirownership percentages and profit sharing inaccordance with those percentages. The partiesexecuted a second operating agreement providingfor different percentages based on the defendants’representation that the bank required thedefendants to have a greater ownershippercentage. The plaintiffs claimed that thedefendants orally agreed that the originalpercentages would be reinstated after the loan hadbeen paid. Ultimately, the parties executed a thirdoperating agreement that provided for the sameownership percentages as the second operatingagreement, but a different formula for the division ofprofits. The plaintiffs sued the defendants assertingclaims for breach of the oral agreement to reinstatetheir original ownership and profit sharingpercentages, breach of fiduciary duty, fraud, and anaccounting. The plaintiffs sought damages in anamount to be determined in an accounting andbased on the provisions of the first operatingagreement. The defendants asserted variousaffirmative defenses. The trial court denied theplaintiffs a jury trial on the basis that the reliefrequested was equitable because it in essencesought rescission of the second and third operatingagreements and an accounting. The court ofappeals analyzed the plaintiff’s claims andconcluded that they were legal and that the trialcourt erred in denying plaintiff a jury trial. The courtdid not view the requested accounting as the typethat sounds in equity, and the court rejected theargument that the plaintiff’s claims requiredrescission of the second and third operatingagreements. The court concluded that the plaintiff’srequested remedy of damages on each of hisclaims provided adequate relief at law and made itunnecessary for the court to invoke its equityjurisdiction.

Securities Laws

J. Stan Developments, LLC v. Lindo, No.2008-CA-001796, 2009 WL 3878084 (Ky. App.Nov. 20, 2009). The court affirmed a judgmentholding the sole member of an LLC personally liablefor violations of Kentucky securities laws. The


member argued that he could not be liable unlessthe LLC veil was pierced, but the court interpretedthe LLC statute and securities laws to provide forliability based on the member’s own participation inthe transaction in issue.

Gordon v. Elite Consulting Group L.L.C.,No. 08-CV-10772, 2009 WL 4042911 (E.D. Mich.Nov. 19, 2009). The plaintiff brought state andfederal securities fraud claims against a Florida LLCand several individuals involved in the LLC.Redman, who was the registered agent and amanager of the LLC, argued that she was employedby another company that offers corporate servicessuch as acting as registered agent and filingcorporate documents of formation and dissolution,and that the plaintiff failed to sufficiently allege thatshe was a “controlling person” who shared liabilitywith the LLC. The court held that the plaintiff hadalleged plausible claims that Redman participatedin the day-to-day operations and possessed thepower to control the alleged misrepresentations andomissions based on actions that must be taken bymembers under Florida law, such as approving andsigning the articles of dissolution, and other filingssigned by her as “managing member.” The courtheld that Redman could not be held liable as anaider and abettor under federal law, and her allegedown acts of “quickly” forming and dissolving theLLC and other companies did not plausibly supportthe requisite elements of reliance and proximatecause.

Bankruptcy

In re BH S&B Holdings LLC (OfficialCommittee of Unsecured Creditors v. BarHarbour Masters Ltd.), 420 B.R. 112 (Bankr.S.D.N.Y. 2009). This case arose out of thebankrupt Steve & Barry’s clothing stores and thesubsequent bankruptcy filing by the purchaser, BHS&B Holdings, LLC (“Holdings”) and itssubsidiaries. The Official Committee of UnsecuredCreditors (the “Committee”) sought to recovermoney for the estate through veil piercing, breachof fiduciary duty, and equitable subordination orrecharacterization claims. The court analyzed theCommittee’s pleadings with respect to its claim thata loan by a Holdings affiliate should be equitablysubordinated or recharacterized as equity andfound that the Committee had not sufficiently pledfacts supporting the factors relevant to either claim.The Committee was given leave to amend itspleadings on the equitable subordination claim, butthe recharacterization claim was dismissed withprejudice.

In re Resource Energy Technologies,LLC, 419 B.R. 746 (W.D. Ky. 2009) (holdingdiscovery order entered in state court requiringmembers of debtor LLC to turn over documents ofLLC did not violate automatic stay becausemembers have rights to access, inspect, and copyLLC information under Kentucky law in theircapacities as members and such action is not anact to obtain possession of or exercise control overproperty of the estate).

In re Longview Aluminum, L.L.C. (Brandtv. Tabet Divito & Rothstein, LLC), 419 B.R. 351(Bankr. N.D. Ill. 2009). The trustee sought torecover payments from the LLC debtor to an LLCmember (Forte) who owned a 12% interest and wasone of five members of the LLC’s board ofmanagers. Because the payments were within ayear of the bankruptcy, but not within 90 days, thepayments were not recoverable unless Forte wasan insider. The court noted that an LLC fits withinthe definition of a “corporation” for purposes of theBankruptcy Code but that no consensus hasdeveloped with respect to the appropriate approachto determine whether a member or manager of anLLC is an insider of the LLC. The court describedtwo conflicting approaches in the case law. Oneapproach focuses on the alleged insider’s control ofthe debtor, and Forte relied upon this approach toargue he was not an insider. The other approachfocuses on the similarity of the alleged insider’sposition to the per se categories of an insider. Thetrustee advocated that this test be applied, and thecourt chose to follow this approach as the betterinterpretation of the statute. Under the definition ofan “insider,” a corporate director or officer is aninsider regardless of their ability to control thecorporation. Forte’s position as one of fivemanagers gave him a position equivalent to adirector according to the court. The debtor was aDelaware LLC, and the court found Forte’s positionas a manager and member of the LLC accordedhim the same relationship to the LLC as a directorhas to a corporation.

In re Lull (Kotoshiro v. Zapara),Bankruptcy No. 06-00898, Adversary No. 08-90074,2009 WL 3853210 (Bankr. D. Hawaii Nov. 17,2009). The court found that an individual (“Zapara”)was a statutory per se “insider” of the debtor,another individual, by virtue of her co-membershipwith the debtor in an LLC. Zapara was an insider ofthe LLC, which the court stated may be treated as acorporation for purposes of insider analysis, and theLLC was an affiliate of the debtor. Thus, Zapara, asan insider of an affiliate of the debtor, was aninsider of the debtor.


In re Lawrence (Curreli v. Lawrence),Bankruptcy No. 6:08-bk-00961-ABB, Adversary No.6:08-ap-00083-ABB, 2009 WL 3486063 (Bankr.M.D. Fla. Oct. 28, 2009) (holding that fiduciaryduties of care and loyalty imposed on managingmember under Florida LLC statute did notconstitute express or technical trust required bybankruptcy law for purposes of exception todischarge provision).

JD Factors, LLC v. Freightco, LLC,Cause No. 1:09-CV-95, 2009 WL 3401965 (N.D.Ind. Oct. 16, 2009). The defendant LLC sought toamend its answer in a collection suit to assert that amember’s bankruptcy resulted in his dissociationand termination as vice-president and that hisremaining rights as a member or former membernow belonged to his bankruptcy trustee. Theplaintiff argued that the defendant should be deniedleave to amend on the basis that the proposedamendment was contrary to law. The plaintiffargued that the amended allegations violated theautomatic stay provisions and were premised on anipso facto clause prohibited by Section 365(e)(1).The court rejected the plaintiff’s arguments, notingthat the bankrupt member’s services as vice-president may well be more akin to a personalservices contract than an executory contract that isfreely assignable to the trustee. The court statedthat the plaintiff did not cite any authority for itsassertion that service as an officer of a companyrises to the level of “property” of the bankruptcyestate. The court found it reasonable to infer thatthe member’s termination as vice-president did notviolate the automatic stay. Additionally, the courtstated that the ipso facto clause in the operatingagreement was not necessarily unenforceablegiven that the Indiana LLC statute provides that noperson can become a member without the consentof all members unless otherwise provided in theoperating agreement. In any event, the plaintiff didnot challenge the statement in the proposedamendment that the bankrupt member’s remainingrights as a member inure to the bankruptcy trustee.Thus, the court concluded that the proposedamendment was not “contrary to law” and that leaveto amend should be granted.

In re Phoenix Turf Farms, LLC (PhoenixTurf Farms, LLC v. Hansen Mueller Co.),Bankruptcy No. 07-40545-JJR-12, Adversary No.No. 09-40004-JJR, 2009 WL 3350337 (Bankr. N.D.Ala. Oct. 15, 2009) (denying claim by LLC debtorfor punitive damages and attorney’s fees becauseSection 362(k)(1) provides for punitive damages

and attorney’s fees for willful violation of stay onlyby individual debtor).

Neary v. Stamat, No. 08 C 6543, 2009 WL2916834 (N.D. Ill. Sept. 2, 2009) (discussing howincome from single-member LLCs should be treatedfor purposes of question of debtors’ Statement ofFinancial Affairs regarding gross income receivedby debtors and declining to resolve whetherquestion required debtors to report only theirpersonal profit from LLCs or total income of LLCsbecause of substantial disparity between debtors’statement and tax return even assuming debtorswere only required to report personal profit fromLLCs).

Fraudulent Transfer

Otero v. Vito, Civil Action No. 5:07-cv-405(CAR), 2009 WL 3063426 (M.D. Ga. Sept. 22,2009). Although the undisputed evidence showedthat various entities, including numerous LLCs,were used to defeat justice and evade contractualor tort responsibilities, the court was precluded fromexercising the equitable power of piercing the veilon behalf of a creditor seeking recovery from theentities to satisfy the debt of the individual whocreated and controlled the entities because theGeorgia Supreme Court has held that reverse veilpiercing is not permitted under Georgia law. Thecourt, however, used the alter ego finding inconnection with a finding that transfers of money,real property, and personal property from theindividual to the entities were fraudulent under theGeorgia Uniform Fraudulent Transfer Act. Proof ofactual intent to hinder, delay, or defraud hiscreditors was established by the debtor’s affidavit inwhich he explained that he used layeredcorporations, LLCs, and trusts as part of acoordinated strategy to protect personal assetsfrom attachment by creditors. Even in the absenceof the admissions of the debtor, the court reviewedevidence of five of eleven factors indicating actualfraudulent intent under the Georgia UniformFraudulent Transfer Act. Although the court statedthat the complex web of trusts, corporations, andLLCs had not yet been completely untangled, andall of the hurdles set up by the debtor had not beencompletely removed, the court concluded thatenough was known to warrant summary judgmentin favor of the creditor.

Dearborn Street Building AssociatesLLC v. D & T Land Holdings, LLC, No. 1:07-cv-1056, 2009 WL 3011245 (W.D. Mich. Sept. 16,2009) (noting Michigan Uniform Fraudulent Transfer


Act does not explicitly define “insider” with respectto LLC, but concluding that transfer was to “insider”where sale was between LLCs with commonmember and member personally benefitted fromtransaction).

In re Supplement Spot, LLC (Floyd v.Option One Mortgage Corporation), 409 B.R. 187(Bankr. S. D. Tex. 2009). The bankruptcy trusteebrought an action to avoid payments that weremade from an account funded by the debtor LLC’sbusiness operations. The account was styled“Marcella Ortega dba Young Again Nutrients,” andMarcella Ortega was president of the debtor LLC.The payments challenged by the trustee werepayments on mortgage debts of Ortega, and thecourt held that they were avoidable as fraudulenttransfers. In order to find that the payments werefraudulent transfers, the court had to find that theaccount was the property of the debtor LLC. Theaccount was listed as an asset of the debtor LLCand contained funds generated by the LLC’sbusiness, but the mortgage company claimed thatOrtega mistakenly turned over the account to thetrustee. The court found that the evidence wassufficient to support the finding that the account wasthe LLC’s property based on an inference drawnunder the “uncalled witness rule.” Under this rule,the fact that the mortgage company failed to callOrtega as a witness allowed an inference that hertestimony would be unfavorable to the mortgagecompany. Alternatively, the court found that theaccount was properly considered property of theLLC because the court could pierce the “individualveil” and view the account as property of the LLC.The court explained that a court may sometimes“pierce the corporate veil” to determine whether theactivities and property of a corporation should beattributed to its individual principal or principals, butstated that the court here was being asked to do theopposite– to “pierce the individual veil” and attributeproperty of Ortega to the debtor LLC. The courtnoted that courts generally protect the individualassets from the reach of a corporation’s bankruptcy,but cited the corporate alter ego doctrine as a basisto treat individual property as corporate property.The court stated that it would treat the account asproperty of the LLC because Ortega herselfdisregarded the separation between the LLC’sfunds and her funds by using the accountexclusively to pay her personal expenses when theaccount was funded exclusively by the LLC’sbusiness. Further, the court noted that injusticewould result if the account were not treated as theproperty of the debtor because the fraudulenttransfers, if not avoided, would seriously hinder thetrustee’s ability to administer the bankruptcy case.

Creditor Rights

Olmstead v. Federal Trade Commission,__ So.3d __, 2010 WL 2518106 (Fla. 2010). TheFlorida Supreme Court answered a certifiedquestion from the Eleventh Circuit Court of Appealsregarding the rights of a judgment creditor of asingle member LLC and concluded that the FloridaLLC charging order statute does not preclude ajudgment creditor from using the remedy ofexecution on the interest of a single member of anLLC to reach all of the member’s right, title, andinterest in the LLC. The court reviewed theconcepts of membership, a membership interest,assignment, and the charging order under theFlorida LLC statute and concluded that theassignee of a single member of an LLC becomes amember without the consent of anyone other thanthe transferor member because the set of “allmembers other than the member assigning theinterest” (whose consent is required under thestatute to admit an assignee of a member) is empty.The court then concluded that the charging orderremedy is not the exclusive remedy of a judgmentcreditor of an LLC member because the chargingorder provision does not state that the chargingorder is the exclusive remedy, in contrast to theFlorida general and limited partnership statutes,which explicitly provide that the charging order isthe exclusive remedy by which a judgment debtorof a partner may satisfy a judgment out of thejudgment debtor’s interest. The court noted thatthere is a general execution provision in Florida thatapplies to various forms of real and personalproperty, including “stock in corporations,” and thecourt stated that an LLC is a type of corporate entitythe ownership interests of which can reasonably beunderstood to fall within the scope of “corporatestock.” The appellant judgment debtors did notcontend that the execution statute did not by itsterms extend to an ownership interest in an LLC orthat the challenged order did not comport with therequirements of the execution statute. They reliedonly upon the exclusivity of the charging orderprovision. Because the court concluded that therewas no basis to infer that the charging order statuteprovides the sole remedy for a judgment creditoragainst a judgment debtor’s interest in a singlemember LLC, it does not displace the generalexecution remedy with respect to such an interest.Thus, the court held that a court may order ajudgment debtor to surrender all right, title, andinterest in the debtor’s single member LLC to satisfya judgment. A strenuous and lengthy dissentingopinion argued that the majority rewrote the LLCstatute and rendered the assets of all LLCs in


Florida vulnerable because the majority’s reasoningapplied with equal force to multi-member LLCs.

Intra-Corporate Conspiracy

ODP, LLC v. Shelterlogic, LLC, No.X09CV064020086, 2009 WL 2783692 (Conn.Super. July 31, 2009) (holding that individuals whowere members and managers of LLC, as agents ofLLC, were shielded from liability for civil conspiracyby intracorporate conspiracy doctrine because theirconduct did not fall within “scope of employment” or“scope of agency” exception, which recognizesdistinction between collaborative acts done inpursuit of employer’s business and private actsdone by persons who happen to be at workplace).

Real Estate Transfer Laws

Skylake Insurance Agency, Inc. v. NMBPlaza, LLC, 23 So.3d 175 (Fla. App. 2009). Thecourt held that a ten-year commercial lease did notsatisfy a Florida statute applicable to conveyancesof real property because it lacked two subscribingwitnesses as required by the statute for a lease ofmore than one year. Though the lease wasproperly executed under the Florida LLC statute,the court agreed with the views of the RealProperty, Probate and Trust Law Section of theFlorida Bar expressed in its amicus curiae brief andheld that the lease must also comply with thestatutory two-witness requirement. Recognizingthat an LLC is not a corporation, the court rejectedthe argument that an exception in the statute forcorporations applied to the LLC. The court alsoagreed with the amicus argument that the barefailure of the landlord to have his signaturewitnessed does not give rise to an estoppelbecause such a result would effectively render thestatutory two-witness requirement unenforceable.Thus, the court of appeals affirmed the trial court’sdenial of specific performance. The courtdetermined, however, that the lessee might stillhave a claim for breach of contract against thelandlord, citing case law that permitted a partyunder some circumstances to pursue a claim fordamages under a deed or lease that was defectiveunder the statute requiring two witnesses where thedocument otherwise complied with therequirements of the statute of frauds.

Alcazar Tenants’ Association v. SmithProperty Holdings, L.P., 981 A.2d 1202 (D.C.App. 2009) (holding that multi-step transfer of realproperty ownership involving various LLCs andother entities did not constitute “sale” within

meaning of provisions of District of Columbia RentalHousing Conversion and Sale Act as statute existedat time).

Insurance

Wilcox v. Weber Insurance, 982 A.2d1053 (Conn. 2009) (holding managing member andanother member sufficiently alleged interests inautomobile and umbrella insurance policies so as tohave standing to sue insurer that refused to defendand indemnify in connection with accident involvingdump truck owned by LLC).

Motorists Mutual Insurance Company v.Brickner, Nos. 09AP-281, 09AP-282, 2009 WL2940196 (Ohio App. Sept. 10, 2009) (interpretingterm “you” in automobile insurance policy to applyto LLC or any of three members listed ondeclaration page as named insured).

Statute of Frauds

Skylake Insurance Agency, Inc. v. NMBPlaza, LLC, 23 So.3d 175 (Fla. App. 2009). Thecourt held that a ten-year commercial lease did notsatisfy a Florida statute applicable to conveyancesof real property because it lacked two subscribingwitnesses as required by the statute for a lease ofmore than one year. Though the lease wasproperly executed under the Florida LLC statute,the court agreed with the views of the RealProperty, Probate and Trust Law Section of theFlorida Bar expressed in its amicus curiae brief andheld that the lease must also comply with thestatutory two-witness requirement. Recognizingthat an LLC is not a corporation, the court rejectedthe argument that an exception in the statute forcorporations applied to the LLC. The court alsoagreed with the amicus argument that the barefailure of the landlord to have his signaturewitnessed does not give rise to an estoppelbecause such a result would effectively render thestatutory two-witness requirement unenforceable.Thus, the court of appeals affirmed the trial court’sdenial of specific performance. The courtdetermined, however, that the lessee might stillhave a claim for breach of contract against thelandlord, citing case law that permitted a partyunder some circumstances to pursue a claim fordamages under a deed or lease that was defectiveunder the statute requiring two witnesses where thedocument otherwise complied with therequirements of the statute of frauds.

Unfair Trade Practices


Searing v. Grocki, No.X03CV084041080S, 2009 WL 3839295 (Conn.Super. Oct. 21, 2009) (holding that allegations ofmisconduct by some members of LLC as againstother members of LLC did not occur in “conduct oftrade or commerce” for purposes of ConnecticutUnfair Trade Practices Act).

Carcano v. JBSS, LLC, 684 S.E.2d 41(N.C. App. 2009). The plaintiffs asserted claims forbreach of contract, unfair and deceptive tradepractices, unjust enrichment, constructive trust, andcommon law fraud based on the defendants’solicitation of money from the plaintiffs for thepurpose of purchasing properties. The partiesagreed that the venture would be organized as anLLC, and the plaintiffs alleged that one of thedefendants, Browder, represented to them that theLLC was formed when it was not. Severalproperties were deeded to the non-existent LLC,and the court characterized these deeds as voidbecause the LLCs were non-existent. With regardto the unfair or deceptive acts or practices claims,the court held that the alleged deceptive practices(marketing memberships in a fictitious LLC) weremerely assertions that the defendants askedplaintiffs to invest in a business arrangement, andthese capital raising ventures among sophisticatedbusiness persons fell outside the scope of the NorthCarolina Unfair and Deceptive Trade Practices Act.Also, the court held that the allegations did notshow that the acts or statements were “in oraffecting commerce” and did not allege an actual,concrete injury in fact.

Gift Tax

Petter v. Commissioner of InternalRevenue, T.C. Memo 2009-280, 2009 WL 4598137(U.S. Tax Ct. 2009) (discussing various aspects ofLLC’s structure and formula clauses in transferdocuments for valuing LLC membership interestsgifted to charities and concluding clauses werevalid).

Wage and Employment Laws

O’Neal v. Campbell, Civil Action No.5:09cv110-DCB-JMR, 2009 WL 3489868 (S.D.Miss. Oct. 23, 2009) (finding plaintiff employed byLLC had adequately alleged claim against LLCmembers as “employers” under Fair LaborStandards Act based on allegations regardingmanagerial and supervisory responsibilities).

Passive Activity Rules

Hegarty v. Commissioner of InternalRevenue, T.C. Summ. Op. 2009-153, 2009 WL3188789 (U.S. Tax. Ct. Oct. 6, 2009). Consistentwith its holding in Garnett v. Commissioner, thecourt found that LLC members may materiallyparticipate in the LLC business under any of theseven tests listed in Section 1.269-5T(a)(1)-(7), andthe court held that the taxpayers participated in thebusiness for more than 100 hours during the year inquestion and that their participation was not lessthan that of any other individual so that theymaterially participated in the business during theyear in question.

Reorganization/Merger/Conversion

Michael’s Finer Meats, LLC v. Alfery, 649F.Supp.2d (S.D. Ohio 2009) (holding Ohio mergerstatute did not automatically pass benefits of non-competition agreement from corporation tosurviving LLC if agreement was not otherwiseassignable, but agreement in question was likelyassignable where it did not contain languageprohibiting assignment, same family remained incontrol of successor LLC, and agreement wasnecessary to protect goodwill of new LLC andemployer who signed agreement).

Tracfone Wireless, Inc. v. AccessTelecom, Inc., 642 F.Supp.2d 1354 (S.D. Fla.2009) (noting effect of conversion with respect tovesting of property of converting entity in convertedentity but holding that conversion of Floridacorporation into LLC did not take effect prior toassignment of intellectual property rights on sameday as conversion, and conversion thus had nobearing on ownership of intellectual property rightsno longer owned by converting entity).

Attorney Liability/Disqualification

Natomas Gardens Investment GroupLLC v. Sinadinos, No. CIV. S-08-2308 FCD/KJM,2009 WL 3055213 (E.D. Cal. Sept. 14, 2009)(disqualifying attorney from representing both LLCand its officer in derivative action and directing LLCto retain independent counsel without prior ties toLLC or other parties to case).

Limited Liability Partnerships:

Diversity Jurisdiction

Lee v. Brown, No. 3:08-CV-01206 CSH,2009 WL 3157542 (D. Conn. Sept. 25, 2009)(stating that rule that partnership has citizenship of


each of its partners for purposes of diversityjurisdiction applies to LLPs).

Foreign LLPs

Total Holdings USA, Inc. v. CurranComposites, Inc., C.A. No. 4494-VCS, 2009 WL3238186 (Del. Ch. Oct. 9, 2009) (interpretinggoverning law provisions of Section 15-106 ofDelaware Revised Uniform Partnership Act andcommenting regarding application of Section 15-106(b) to LLPs).

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