Friday, October 16, 2015
Okay, Then Who Are the Members?
Okay, Then Who Are the Members?
For purposes of federal diversity jurisdiction, 28 USC § 1332, a limited liability company is deemed to be a citizen of each jurisdiction in which one of its members is a citizen. As such, in either asserting or challenging the existence of diversity jurisdiction, it is crucial to be able to identify who are the members of a particular LLC. In a recent decision, the court determined that, on the available evidence, it could not conclusively determine who was or was not a member of a particular LLC. Black Water Management LLC v. Sprenkle, Civ. Act. No. 3:15-CV-365, 2015 WL 5089367 (E.D. Va. Aug. 27, 2015).
Schur and Sprenkle were to establish and be the members of Black Water Management LLC, it to be devoted to the management of certain musical talent. Schur was to invest cash while Sprenkle was to contribute his interest in certain existing talent management contracts. Schur contributed the capital commitment and more. Sprenkle, however, did not contribute the management contracts in that, notwithstanding his assertions, they did not in fact exist. Schur filed suit against Sprenkle and a number of others in federal court on the basis of diversity jurisdiction. One of those defendants, Vorlop, filed a 12(b)(1) motion seeking dismissal on the action on the basis that diversity jurisdiction did not exist. Specifically, as (i) Vorlop was a citizen of Virginia, (ii) Sprenkle was a Virginia citizen, and (iii) Sprenkle’s citizenship would be attributed to Black Water, then both Vorlop and Black Water were Virginia citizens and there is not diversity of citizenship. Schur alleged that Sprinkle is actually not a member of the LLC, and that diversity was retained.
Schur’s argument was that as Sprenkle had never made his agreed capital contribution to the company, he was not a member thereof. In response to this position, the court engaged in an analysis of the language employed in the operating agreement, finding that member status and satisfaction of the capital contribution obligation were not coextensive. Rather, while that was an obligation to make certain contributions, the language of the operating agreement did not define satisfaction of that contribution obligation as a condition precedent to becoming a member. Rather, one was a member with a capital contribution obligation. Citing both another Virginia case, Chaudhary v. Broad, 60 Va. Cir. 128, 2002 WL 183-1990, at *2 (Va. Cir. Ct. July 25, 2002) and Ribstein & Keatinge on Limited Liability Companies § 507, the court noted that it is entirely possible to, in the operating agreement, condition member status upon satisfaction of the capital contribution obligation, but then the failure thereof one may still be a member. The court found that it could not be determined at this juncture that Sprenkle as was not a member.
With respect to extrinsic evidence, namely tax returns, it was found that they did not address whether Sprenkle was a member of the company at the time the complaint was filed.
Ultimately, Vorlop’s 12(b)(1) motion to dismiss was at this juncture denied on the basis that Vorlop had not carried his burden of proof that Sprenkle was a member of Black Water Management.
This case highlights the importance of defining in the operating agreement what are the conditions precedent to becoming a member versus what are the obligations imposed upon persons who are already members.