The limited liability company is relatively young. Though origin research is always a dubious task, my efforts tell me that the first LLC was created in 1977 in Wyoming, followed by other LLCs in Florida in 1982. The years since then have witnessed the LLC's rise to the closely held entity of choice among business owners.
One benefit of the LLC's youthful age is that many of the minds that were most influential in its early-stage development are still teaching, practicing, and studying, all while continuing to lend their expertise on LLC formation, regulation, and litigation. And your best chance of catching all those prominent minds in one place is at the American Bar Association's annual LLC Institute.
For those interested in learning the intricacies of the LLC laws directly from the experts, I highly recommend attending the two-day conference. While a single-post recap inevitably won't do justice to the many presentations, panels, and discussions at the Institute, this week's post attempts to sample some of the best business divorce topics highlighted in the 2024 LLC Institute.
Caselaw Update
Kelley M. Bender, Cristin C. Keane, and Professor Beth Miller hosted a discussion of recent developments in LLC jurisprudence throughout the 49 states not named Delaware. The panel hit on developments in the world of LLC dissolution, disassociation, veil-piercing, and derivative standing. The highlights from the business divorce litigator in the audience:
Does a sale of substantially all of an LLC's assets constitute dissolution? The panel discussed Southern Advanced Materials, LLC v Abrams, 2023 NY Slip Op 04704 (1st Dept Sept. 21, 2023) (which we blogged about here), which considered whether an asset sale triggered a member's rights to a "dissolution premium" under the terms of the operating agreement, stressing the familiar warning that LLC operating agreements mean what they say.
Pennsylvania pipes up on the 1545 Ocean Avenue standard for judicial dissolution of an LLC, finding that member deadlock is sufficient. The panel discussed Toth v Toth, 2024 PA Super. 192 (Aug. 27, 2024) where the Superior Court of Pennsylvania held that the trial court properly dissolved a family-owned LLC where the members were gripped by deadlock concerning core operations of the company: "As set forth above, the trial court clearly explained the facts of this matter, the deadlock between the parties, the injury and harm to [the LLC], and that it was not practicable for the company to continue."
How to rescind a wrongly-filed certificate of dissolution.Patel v New Jersey Dept. of Treasury, 318 A3d 685 (NJ Super. June 18 2024), considered the unusual circumstance where a former member of an LLC filed—without authority—a certificate of dissolution with the State of New Jersey. When the LLC's current ownership learned of the dissolution, they commenced an action against the New Jersey Department of Treasury, Division of Revenue and Enterprise Services, seeking an order compelling reinstatement of the LLC's good standing. The Appellate Division of the New Jersey Supreme Court held that the courts had jurisdiction to direct rescission of a wrongly-filed certificate of dissolution.
A Miss-step toward fulsome challenges to derivative standing? Most interestingly, the panel discussed how a recent Mississippi decision, Landrum v. Livingston Holdings LLC, 2024 WL 3833548 (Miss. Jul. 18, 2024), divested a 49% member of derivative standing due in part to the acrimony between her and the 51% member.
What started as a business owned 50/50 by two families, the Landrums and the Sharpes, morphed into the Sharpes' holding a slight 51% majority due to the Landrums' failure to meet certain capital calls. Following their dilution—and after the parties managed to weave an impressively complicated web of subsidiaries and intercompany transfers—the Landrums sued the Sharpes both directly and derivatively on behalf of Livingston Holdings LLC for the Sharpes' alleged mismanagement and diversion of assets.
But the Landrums' derivative claims were short lived. The trial court (affirmed by the Supreme Court of Mississippi) disqualified Jill Landrum as a proper derivative plaintiff due to her "vindictiveness, the magnitude of her personal interest as compared to the interest in the derivative action, economic antagonisms and his determination that the suit was in essence a personal damages suit."
The Oppression Doctrine in the Age of LLCs
Drawing from his publication in the Florida State University Business Review, Fezzick, Are There Rocks Ahead? Navigating the Oppression Doctrine in the Age of LLCs, Professor Kleinberger offered his views concerning the migration of the corporate "shareholder oppression" doctrine to the land of LLCs. While ultimately acknowledging the reality that the oppression doctrine likely is here to stay, Professor Kleinberger's remarks prompt some insightful discussion about whether that doctrine should be here.
Professor Kleinberger explained that the concept of shareholder oppression evolved in corporate law over decades in response to the abuses that can arise in the strict "majority rules" landscape of corporations. LLCs, however, are "creatures of contract," which place a premium on private ordering and unanimous consent.
With those different roots, has anyone stopped to ask whether the world of LLCs needs the oppression doctrine in the same way that corporations do? There are some good arguments for answering that question in the negative: the private ordering focus of LLCs means that the minority member necessarily consented to the rights (and vulnerabilities) of being a minority member, including the risks of oppression. Additionally, an LLC operating agreement's implied covenant of good faith and fair dealing (some of the Professor's thoughts here) is an often-powerful and more natural backstop against "oppressive" conduct by the majority.
On the other hand, there is some argument that the risks of oppression might be worse for minority LLC members than for minority shareholders due to the illiquidity of the interests, the often close personal relationships among the members, and the high bar to judicial dissolution.
But alas, despite the above considerations, in many of the cases where courts graft the corporate oppression doctrine onto an LLC, they do it with very little analysis (see Pointer v Castellani, 455 Mass 537 [Mass 2009]).
LLCs in Extremis: A Survey of Recent Business Divorce Cases from Around the Country
My NYBD co-authors Peter Mahler and Becky Baek, and Delaware expert Kurt Heyman hosted a lively discussion highlighting several of our favorite recent business divorce blogs, as well as other decisions from around the Country. My favorites:
Weinstein v Wallace, 2024 N.Y. Slip Op. 05327 (2nd Dept 2024), the hot-off-the-press New York decision of first impression (which Peter Mahler blogged about just last week), concerning the rights of a deceased member's estate. Upon the death of an LLC member, the trial court held—consistent with substantial authority on point—that under sections 602, 603, and 608 of the LLC law, the estate of the deceased member merely holds a non-voting, economic interest in the LLC.
But the Second Department reversed, holding that:
Section 8.1(d) of the . . . LLC operating agreement unambiguously provides that a deceased member's estate shall have all of the rights of a member for the purpose of settling or managing its estate, which would include a member's voting rights (see Limited Liability Company Law § 608; Matter of Andris v 1376 Forest Realty, LLC, 213 AD3d 923, 924)."
Tegra Corporation v. Boeshart, 317 Neb. 100 (2024) (Nebraska), which adopted the Auerbach standard for review of a decision made by a special litigation committee: a Court reviews the decision and process of the SLC de novo to determine whether the SLC "conducted its investigation and made its recommendation in good faith, independently, and with reasonable care."
Tegra features a majority LLC member's appointment of a forensic accountant as a one-man SLC in order to investigate allegations against himself for waste and misappropriation of LLC assets. Ultimately, the one-man SLC recommended that the LLC settle the claims against the majority member.
Reviewing the SLC's decision, the Court held that the SLC did not satisfy its burden of demonstrating it exercised reasonable care in conducting its investigation and making its recommendations. Among other problems, the SLC's investigation was strictly an accounting exercise—the Court quoted the SLC's emphatic disclaimer of any legal investigation whatsoever: "Are you speaking of a legal duty? I don't do the law.... I don't understand the law. I didn't do the law." This SLC apparently forgot the "L."
Conclusion
In addition to the above, the Institute also featured programs on LLCs with Series, the Corporate Transparency Act, a Delaware Caselaw Update, and other current and deeply interesting topics.
Last year, I remarked that the interest and intellect on display at the LLC Institute made certain that the future of the LLC was in good hands. I'm more certain of that than ever, and I am looking forward to next year's Institute.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
