Business Divorce Nation: Five States, Five Cases
April 10, 2017
It’s true that the statutory and common-law rules at play in business divorce cases can vary widely from state to state. But it’s also true that court decisions in one state can influence courts in other states, and can provide business divorce lawyers with fresh ideas and novel arguments. I like to think of it as legal cross-pollination.
For many years, one of the nation’s leading authorities on business organization law, Professor Elizabeth Miller at Baylor Law School, has been collecting, curating, and publishing detailed synopses of cases from around the country involving LLCs and other unincorporated business entities, with a large complement of dissolution, breach of fiduciary duty, and other cases featuring disputes among business co-owners. It’s a terrific resource for keeping up with nationwide case law developments. Some of Professor Miller’s summaries can be found online, but the best way for lawyers to gain access to them on a regular basis is to join the LLCs, Partnerships and Unincorporated Entities Committee of the ABA’s Business Law Section. That’s the same committee that sponsors the incomparable LLC Institute every year.
Professor Miller’s most recent sampling of (non-Delaware) partnership and LLC cases was presented at a session of the 2017 Spring Meeting of the Business Law Section in New Orleans. I’ve selected from it and further distilled in the following summaries a quintet of business divorce cases from a quintet of states other than New York.
Kentucky: Yes, We Have No Fiduciary Duty. In Griffin v Jones, 170 F.Supp.3d 956 [W.D. Ky. 2016], the plaintiff and defendant were direct and indirect 50/50 owners of two Kentucky LLCs, a Wyoming LLC, and a Kentucky corporation. When their relationship hit the skids, Griffin sued Jones who countersued Griffin for breach of fiduciary duty as to each entity. On Griffin’s motion for summary judgment, the District Judge dismissed each of Jones’s claims, holding that Griffin owed Jones no fiduciary duty. First, the court held that under Kentucky law, a shareholder of a close corporation as such owes no fiduciary duty to the other shareholders (Griffin was neither an officer nor director of the corporation). Second, Griffin owed no fiduciary duty as a non-managing member of the two, manager-managed Kentucky LLCs (Jones was the manager of both). Third, the Wyoming LLC was owned by a trust of which Jones and Griffin were beneficiaries; Griffin, as a non-member and non-manager of the manager-managed LLC owed Jones no fiduciary duty (again, Jones was manager). The outcome mirrors what would happen in a New York court if the LLCs were formed in New York. It’s a different story as to the corporation, since New York case law has long recognized a fiduciary duty among co-shareholders of closely held corporations.
Mississippi: Kiss That Capital Contribution Goodbye. In Kilpatrick v White Hall on MS River, LLC, No. 2014-CA-01485-SCT [Miss. Sup. Ct. 2016], the plaintiff made capital contributions totaling $186,500 and was listed as a member in the LLC’s operating agreement (which he didn’t sign) and on the LLC’s tax returns for three years. The problem was, the operating agreement unequivocally required a $500,000 capital contribution to become a member, and the plaintiff never made up the difference. The Mississippi Supreme Court upheld the lower court’s ruling that the plaintiff never became a member. The plaintiff’s argument, that the operating agreement was invalid because it wasn’t signed by all the members, fell short because the plaintiff never attained member status. The court also rejected the plaintiff’s constructive trust claim to recover his contributions on the ground the other members “relied to their detriment on [plaintiff’s] never-fulfilled promise to contribute the remainder of his $500,000.” Ouch.
Ohio: An Arbitration Clause Too Far. In Leight v Osteosymbionics, LLC, 2016 Ohio 110 [Ohio App. 2016], a 55% member and two 22.5% members entered into an LLC operating agreement permitting amendment of the agreement by majority vote of the members. The 55% member acting alone signed an amended and restated operating agreement naming himself the sole manager and also adding a broad, mandatory arbitration clause. When the minority members filed suit against the majority member for mismanagement of the LLC, the latter sought to compel arbitration under the amended agreement. The lower court held the arbitration clause unenforceable and the appellate court agreed, holding that “there was no meeting of the minds regarding arbitration as the binding method of alternative dispute resolution” and that “a party cannot be forced to arbitrate a dispute which he or she did not agree to arbitrate.”
New Hampshire: The Reincarnated LLC. In McDonough v McDonough, No. 2015-0694 [N.H. Sup. Ct. 2016], three brothers entered into an LLC operating agreement providing for a 20-year term for the company. The LLC’s certificate of formation likewise provided for dissolution in 20 years. In the final year of the 20-year term, one brother sued for a declaration enforcing the dissolution. In response, shortly before the dissolution date the other two brothers voted to dissolve the LLC and then immediately voted to revoke the dissolution. The Supreme Court affirmed the lower court’s decision allowing continuation of the LLC. The ruling rejected the plaintiff’s contention that the LLC’s term could be modified only by unanimous consent to amendment of the operating agreement, instead pointing to a provision in New Hampshire’s LLC statute allowing members by majority vote to revoke a dissolution at any time before the LLC’s winding up. The court also discounted the plaintiff’s reliance on the dissolution date in the certificate of formation, finding that dissolution is governed by the operating agreement.
Connecticut: LLC Winding Up Off Limits to Assignee. In Styslinger v Brewster Park, LLC, 138 A.3d 257 [Conn. Sup. Ct. 2016], pursuant to a divorce settlement the plaintiff was assigned his ex-wife’s interest in the subject LLC. The other members refused to consent to his admission as a member which, under Connecticut law, left the economic interest in the plaintiff’s hands and membership voting rights in the ex-wife’s hands. The plaintiff, bereft of any subsequent distributions, filed an action seeking to dissolve and to wind up the LLC’s affairs. The lower court dismissed the action based on lack of standing. On appeal to the Connecticut Supreme Court, the plaintiff argued that the statute confers standing on an assignee to seek a winding up even in the absence of a dissolution. The high court disagreed, concluding that under the statutory scheme dissolution is a necessary precondition to a winding up, and that since only a member or someone on the member’s behalf can seek dissolution, and because plaintiff’s assignor retained non-economic membership rights until the assignee becomes a member, the plaintiff as a non-member assignee could not seek a winding up.