Friday, March 31, 2017
Mistaken Identity of Capacity Does Not Eliminate Ability to Bind LLC
In a decision from California, the court consider whether the failure to correctly identify the role in which a person signed a document rendered the agreement unenforceable. In this instance, the court answered “no.” Western Surety Co. v. La. Cumbre Office Partners, LLC, 2017 Cal. App. LEXIS 77 (2017).
In this instance, there was an LLC (“Manager LLC”) that itself was the manager of another LLC (“Managed LLC”). The Manager LLC was in turn managed by a natural person (“Person”). When, however, Person signed a document on behalf of the Managed LLC, he incorrectly identified himself as its managing member rather than the managing member of its manager. The question under consideration is whether Managed LLC on whose behalf the document had been executed was bound.
A pplying language from California's prior LLC Act (although it is worth noting that the same language appears in the current Act), the court found that Managed LLC was properly bound notwithstanding the fact that Person had incorrectly indicated that he was the manager of the LLC.
Wednesday, March 29, 2017
Sixth Circuit Court of Appeals Applies Law Allowing Employee to Keep Handgun in Car on Company Property; Once Removed From the Car the Protection was Eliminated
Sixth Circuit Court of Appeals Applies Law Allowing Employee to Keep Handgun in Car on Company Property; Once Removed From the Car the Protection was Eliminated
In a decision rendered earlier this month by the Sixth Circuit Court of Appeals, it applied the Kentucky statute providing that an employee is entitled to possess a handgun on company property so long as that gun is kept in the car. In this case, an employee removed the gun from the car, and thereby moving himself outside of the law’s protection. Holly v. UPS Supply Chain Solutions,, Inc., No. 16-5337 (6th Cir March 2, 2017).
Holly was an employee of UPS Supply Chain Solutions. One day, while driving to work, he experienced car troubles. His manager gave him permission to leave work and take the vehicle to a repair shop, sending along another member of management to drive Holly back to work.
Holly’s car, however, contained a handgun in the center console. “Because Holly did not want to leave his handgun in the car while it was at the shop, he asked a subordinate employee, Kenneth Moore (who was working at the time, if he could store the gun in Moore's vehicle while it was being repaired. Moore agreed, and, in the UPS SCS parking lot, Holly removed the gun from his car and placed it in Moore's.” Slip op. at 2. Moore, however, became uncomfortable with the idea of having the gun in his car, and reported it to a supervisor. Later, UPS security became aware of the incident and ultimately terminated Holly's employment. One of the bases for that termination was his request that Moore do him a favor on company time, a rationale later expanded to include “that the reasons for Holly’s termination were: (1) misusing company time; (2) exhibiting poor decision-making skills; (3) putting a subordinate in an awkward and potentially risky position; and (4) general performance issues.” Holly then brought suit on the basis that his termination violated Kentucky's public policy as set forth in KRS §§ 527.020 and 237.106. The former statute provides in part:
No person, public or private, shall prohibit a person licensed to carry a concealed deadly weapon from possessing a firearm, ammunition, or both, or other deadly weapon in his or her vehicle in compliance with the provisions of KRS 237.110 and 237.115.
In turn, KRS § 237.110 provides, in part, that a private employer “may not prohibit employees or other persons holding a concealed deadly weapons license from carrying concealed deadly weapons, or ammunition, or both in vehicles owned by the employee.” The majority of the Sixth Circuit panel (Judge Rogers would file a dissent) found the statute inapplicable in that the gun at issue was not in Holly's vehicle, but rather had been transferred to Moore's. Hence, in effect, rather than on having a handgun in his own vehicle at the employer's worksite, Holly had his own handgun in Moore's vehicle, and in that action the statute did not protect.
“Surface” Deed Found to Convey all Mineral Rights Except Specifically Excepted Coal
In a decision earlier this month from the Kentucky Court of Appeals, notwithstanding that the subject deed referred to a conveyance of the “surface” of the property, based upon its particular wording, it was held that the “surface” deed conveyed all mineral rights except the expressly excepted coal rights. Potter v. Blue Flame Energy Corp., No. 2015-CA-000873-MR (Ky. App. March 3, 2017).
At this stage of this long-running dispute, the question was whether all subsurface mineral rights had been conveyed by a prior deed or, in the alternative, had only the coal rights been conveyed, leaving to the holders of the surface rights title to the oil and gas under the subject property. The trial court, granting summary judgment, had held that only the surface rights had been conveyed, without any mineral rights. The Court of Appeals would reverse that determination.
Focusing upon the language separately treating the rights to coal and affording as well the “usual mining rights… for removal of same,” it was held that the retained rights were only to the coal estate and nothing more. Ultimately, the subject deed severed the coal estate from the balance of the property, and had no impact upon the oil, gas and other mineral rights. On that basis the rights to the non-coal mineral rights went with the expressly addressed surface estate.
An LLC and its Members Are Legally Distinct
In a recent ruling from a trial court in Massachusetts, it was reiterated that an LLC is legally distinct from its members. In this instance, an LLC agreed that it would not bring a legal action absent certain predicate acts. This provision was held not applicable when the LLC’s members brought a similar action. Meunier v. Market Strategies, Inc., 1684CV01546-BLS2, 1684CV03592-BLS2 (Mass. Suffolk Ct. Sup. Ct. Feb. 23, 2017).
Market Strategies, Inc. (“MSI”) purchased Cogent Research Holdings. In connection therewith, there were certain deferred and Contingent Payments to be made. The owners of Cogent Research apparently organized a holding company as the vehicle to which those new payments would be made, and the purchase agreement so provided. A subordination agreement made the contingent payments subordinate to certain loan obligations to existing lenders to MSI. That subordination agreement went on to provide that HoldCo “shall not … take any Enforcement Action with respect to” those deferred payments absent the prior written consent of the lender’s administrative agent.
Ultimately, the members of HoldCo would sue MSI in their individual capacities, asserting they were third-party beneficiaries of the agreement pursuant to which Cogent was sold by MSI and that there had been a breach in the making of the Contingent Payments. In response, MSI sued HoldCo for breaching the covenant not to sue. HoldCo was not, however, a party to the suit brought by its members and for that reason a motion to dismiss was granted.
The court found that:
The plain language of the covenant not to sue bars HoldCo, not its individual members, from filing suit to compel MSI to make the Deferred and Contingent payments. MSI does not allege that HoldCo itself is a refileable lawsuit or taken any other enforcement action in violation of its covenant not to sue. Neither the subordination agreement nor the purchase agreement contain a covenant barring Meunier, White, and the irrevocable trust from bringing suit in an attempt to compel MSI to pay over the Deferred Payment and Contingent Payment amounts to HoldCo. Presumably, it never occurred to MSI that it needed such a covenant, since the purchase agreement specifies that those payments are owed to HoldCo, and not to the individual owners and members of Holdco. Nevertheless, the only covenant not to sue binds HoldCo. and not Meunier, White or the trust.
Tuesday, March 28, 2017
Louisiana Court Holds That Assignee Member Is Not a Member With Respect to
Every LLC Act, as a default rule, requires some threshold of the members to approve the admission of an assignee as a member in the company. Often left unaddressed is whether an assignment among the members results in (a) the assignee being, with respect to the assigned interest, treated as a member or (b) treats the assignee, with respect to the assigned interest, as an assignee. In an article recently published in the Journal of Passthrough Entities, I reviewed two decisions, one from Delaware and one from North Carolina. Rutledge, Interest Assignments Among Members, J. Passthrough Entities (March/April 2017) 53; HERE IS A LINK to that article. The Delaware decision, Achaian, Inc. v. Leemon Family LLC, is of little assistance in that it is the interpretation of what can be fairly characterized as curious language in the subject limited liability company agreement. 25 A.3d 800 (Del. Ch. 2001). This case is also reviewed in J. William Callison, Achaian and interest transfers among existing partners and members, Research Handbook on Partnerships, LLCs and Alternative Forms of Business Organizations (Edward Elgar Publishing, 2015). In a similar vein, Ault v. Brady, 37 Fed. App, 222 (8th Cir. 2002), turned on the wording of the particular operating agreement at issue. The second decision reviewed in that article is Blythe v. Bell, 2012 NCDC 60, 2012 WL 6163118 (N.C. Super. Dec. 10, 2012). The one advantage of the Blythe decision is that it interpreted essentially the default rules of the statute. In this decision, the North Carolina Business Court determined that upon an assignment of all of the interest from one incumbent member to another: (i) the management rights are fully conveyed to the assignee; (ii) the assignee may exercise the management rights related to the assigned interest.
The recent decision from Louisiana, Bourbon Investments, LLC v. New Orleans Equity LLC, 207 So.3d 1088 (La. App. 4 Cir. 2016), came to the opposite conclusion as did the Blythe court. Curiously, the Blythe decision was not referenced by the Louisiana court.
This dispute arose out of a failed effort to acquire the famous Galatoire’s Restaurant (as well as a related restaurant in Baton Rouge). One of the issues in contention was whether the suit filed against the prior owners was legitimate turned on the question whether it had been validly approved. In support of the notion that there had not been valid approval of the lawsuit, the defendants pointed to certain interest transfers amongst the members of the plaintiff, claiming that required majority approval had not been received. In opposition, the plaintiffs “maintain[ed] that the general rule that requires unanimous consent for the transfer of full membership interest in an LLC does not apply where such transfer takes place between current member.” The LLC at issue not having a written operating agreement, the question turned on state law, the court observing that:
La. R.S. 12:1330 provides that a membership interest in a limited liability company is assignable, but such assignment entitles the assignee to only “receive such distribution or distributions, to share in such profits and losses, and to receive such allocation of income, gain, loss, deduction, credit, or similar item to which the assignor was entitled to the extent assigned.” La. R.S. 12:1332 provides that, except as otherwise provided in the articles of organization or in an operating agreement, “[a]n assignee of an interest in a limited liability company shall not become a member or participate in the management of the limited liability company unless the other members unanimously consent in writing.” The statute further states that an assignor continues to be a member unless and until the assignee becomes a member.
Again, the plaintiff would argue “that the transfer restrictions set forth in La. R.S. 12:1332 apply only when the assignment is made to a third party who wishes to become a member of the LLC.” Rejecting this assertion, the court would find that:
The literal language of the statue does not support Plaintiffs’ interpretation of La. R.S. 12:1332. The plain language of the statute requires unanimous written consent of all members for an assignee to become a member of or participate in the management of the LLC. The statute does not differentiate between a third party assignee and a current LLC member assignee. The fact that the legislature did not draft a separate set of rules for membership transfers between current LLC members further supports the conclusion that the default transfer restrictions apply regardless of whether the assignee is a third party or a current member.
So there you have it. At least under the North Carolina LLC Act, an interest assignment among the members is not subject to the requirement of member approval to constitute the assignee as a member with respect to the assigned interest. In contrast, in Louisiana, the opposite is true, and the consent of the incumbent members is required to constitute a member with respect to an additional assigned interest.
Several state statutes, with greater or lesser precision, address this point. Tennessee exempts the transfer of management rights among members from any requirement of consent from another member. See Tenn. Code Ann. § 48-249-508(b)(1) (“A member may, without the consent of any other member, transfer governance rights to another member.”) Utilizing a different statutory formula, the same result is dictated by the North Carolina LLC Act.
See NC LLC Act § 57D-5-04(b): [A] transferee of an ownership interest [(a term of art defined to mean all of the rights and obligations (economic, management, and others) of an interest owner in a LLC] or portion thereof who is or becomes a member has to the extent transferred to the transferee (i) the rights and powers and is subject to the restrictions and liabilities of a member under the operating agreement and this Chapter with respect to the transferred ownership interest….” (emphasis added).
The new Pennsylvania LLC Act, albeit in a rather cryptic formula, likewise exempts an assignment among members from any requirement of consent. See 15 Pa. C.S. § 8851(b) (“Only right that may be transferred. – A person may not transfer to a person not a member any rights in a limited liability company other than a transferable interest.”) See also Pa. Drafting Committee Comment:
This section is patterned after Uniform Limited Liability Company Act (2006) (Last Amended 2013) § 501. Absent a contrary provision in the operating agreement or the consent of the members, a “transferable interest” is the only interest in a limited liability company that can be transferred to a non-member. See 15 Pa.C.S. § 8852. As to whether a member may transfer governance rights to a fellow member, the question is moot absent a provision in the operating agreement changing the default rule, see 5 Pa..S. § 8847(b)(2), allocating governance rights per capita. In the default mode, a member’s transfer of governance rights to another member: (i) does not increase the transferee’s governance rights; (ii) eliminates the transferor’s governance rights; and (iii) thereby changes the denominator but not the numerator in calculating governance rights.
Thanks to Bill Callison, Joan Heminway, Warren Kean and Lisa Jacobs for leads on various cases and the Louisiana decision
Wednesday, March 15, 2017
Beware the Ides of March
“Et tu, Brute?”
Today, the Ides of March, marks the anniversary of the assassination of Julius Caesar in 44 B.C. Caesar was famously assassinated at a meeting of the Roman Senate after having (almost certainly apocryphally) been warned to “Beware the Ides of March.” He was presented with a written warning of the conspiracy against him as he was walking to the Senate meeting, but seems to have never read the warning. Although stabbed twenty-three times by the various conspirators, only one wound was fatal.
Caesar’s murder by members of the Senate (but not Cicero – the conspirators were unsure he had the stomach for such an act) was premised upon the notion that they were somehow preserving liberty for Rome; after the deed they paraded through the streets shouting “liberty.” This against the fear that Caesar sought to be king, an especially galling notion in light of Rome having (at least as part of its foundation myth) having been ruled by kings and then thrown them off. Still, at this stage Caesar had been appointed by the Senate Dictator for Life. It seems this subset of the Senate sought to undo what the whole Senate had approved.
“Liberty” was not to be had. Caesar’s death unleashed upon the tottering Roman Republic the Second Civil War of Caesar’s heir Octavian (later to be Caesar Augustus) and his compatriot Marc Antony (Lepidus, the third member of the Second Triumvirate, was a place holder) against the assassins and their various supporters. The night before the assignation a conscious decision had been made to not as well target Marc Antony. In retrospect the assassins would regret that determination.
Assassins Brutus and Cassius (Gaius Cassius Longinus) would each commit suicide after losing a phase of the Battle of Philippi (notwithstanding the presentation in the HBO series “Rome,” they actually died on different days). Cicero (who as noted above was not himself part of the conspiracy) would be executed as part of the proscriptions after the victory of the Second Triumvirate.
Still later Octavian and Antony would turn on one another, Antony’s forces being routed at Actium. Octavian would go on to be the first Roman emperor, Caesar Augustus.
But back to Caesar’s dying words. “Et tu Brute” is not recorded by any classical historian – it is a quote from Shakespeare. Plutarch, who was born exactly 100 years after the assassination, reports that Caesar said nothing after the attack began in earnest. Suetonius wrote that others reported his last words to be “καὶ σύ, τέκνον” (Greek still being the lingua franca of the Romans), transliterated as “Kai su, teknon” or “You also child,” addressed to Brutus (that is Marcus Junius Brutus the Younger, not to be confused with Decimus Junius Brutus, another party to the assignation). There were rumors, later reported by Plutarch (Suetonius is silent on the topic) that Caesar was in fact Brutus’ father – it was known that Brutus’ mother Servilia was Caesar’s mistress. Still that would appear to be something of a stretch; Caesar was 16 at the time of Brutus' conception; Servilla was at that time 28.
For anyone watching the “Spartacus” series, while the sources do not exclude Caesar's participation in the war against Spartacus (i.e., the “Third Servile War”), they provide no details of that participation. Ergo, the details of Caesar's actions as recounted are pure fiction.
Thursday, March 9, 2017
No Valid Claim Against Bank Where it Made Bank Secrecy Act Reports
In a decision rendered early last month by the Kentucky Court of Appeals, it rejected claims by bank customers that, when the bank made reports required by the Bank Secrecy Act relating to suspicious activities, the bank could be held liable to its customers. Rather, the court found that the bank enjoyed absolute immunity. Ventura v. Central Bank, No. 2015-CA-001407-MR, 2017 WL 461256 (Ky. App. Feb. 3, 2017).
The Venturas own and operate Miguel’s Pizza and Rock Climbing Shop, a fixture of the rock climbing community in Kentucky's Red River Gorge. Central Bank, which handled the Ventura’s accounts, had made reports based upon the apparent manipulation of cash deposits. Special cash transaction reporting obligations arise when $10,000 or more is deposited. Additional rules under the Bank Secrecy Act require reporting if it appears that a bank customer is manipulating their deposits such as by making repeated deposits just below the $10,000 threshold. Eventually Central Bank would close the Ventura’s account. The Venturas were indicted on charges of violating the Bank Secrecy Act, but ultimately were acquitted by a jury. Thereafter, they filed this action against Central Bank, asserting a variety of claims based upon the reports that the bank had filed as required by the Bank Secrecy Act.
The trial court, based upon the safe harbor preemption provided by the Bank Secrecy Act, dismissed the complaint, and this appeal followed. The Court of Appeals would likewise find that Central Bank employed absolute immunity from the claims being made. Specifically, the Bank Secrecy Act provides:
Any financial institution that makes a voluntary disclosure of any possible violation of law or regulation to a government agency or makes a disclosure pursuant to this subsection or any other authority, and any director, officer, employee, or agent of such institution who makes, or requires another to make any such disclosure, shall not be liable to any person under any law or regulation of the United States, any constitution, law or regulation of any State or political subdivision of any State, or under any contract or other legally enforceable agreement (including any arbitration agreement), for such disclosure or for any failure to provide notice of such disclosure to the person who is the subject of such disclosure or any other person identified in the disclosure.
Based thereon, there could be no claim against the bank.
Wednesday, March 8, 2017
Massachusetts Court Substantively Consolidates Corporation and Commonly Owned LLC
In a decision rendered last December, a Bankruptcy Court sitting in Massachusetts found, on the facts, that it could “substantively consolidate” the assets of the corporation, the debtor in bankruptcy, and a commonly owned LLC. In re Cameron Construction & Roofing Co., Inc. (Lassman v. Cameron Construction LLC), Case No. 14-13723-JNF, Adv. P. No. 15-1121, 2016 WL 7241337 (D. Mass. Dec. 14, 2016).
Cameron Construction & Roofing Co. was, for all intents and purposes, in common ownership with Cameron Construction, LLC. When the corporation went into bankruptcy, the Trustee (Lassman) sought to bring into the bankruptcy Cameron Construction LLC and its assets.
Cameron Construction LLC was the owner of the property out of which Cameron Construction & Roofing operated. Its articles of organization identified the purpose of the company as owning and managing real estate. It, however, went well beyond that, and had employees who were utilized in the corporation's construction and roofing activities. There was not, however, an employee leasing agreement with respect to those activities, and neither was there a signed lease for the use of the real property. Based on these and other activities indicating that the two ventures were not operated on arm’s-length terms, Lassman sought substantive consolidation.
In response, it was argued that each company was duly organized, that the proper annual reports had been filed with the Massachusetts Secretary of State, and that each company filed its own income tax returns.
The court would find that those distinctions were insufficient to preclude substantive consolidation. 2016 WL 7241337, *7. Specifically:
The Trustee demonstrated that there is a “substantial identity between the entities to be consolidated.” The common ownership and control of the Debtor and the Defendant by Cameron are admitted facts. The Debtor initially contributed $12,000 of capital for a 1% interest in the Defendant, whereas Cameron's contribution of $108,000 for a 99% interest in the Defendant was disproportionate. The capital structure was unfair to the Debtor, which should have been entitled to a greater percentage of ownership in the Defendant given its 10% capital contribution.
The Defendant did not engage in business in accordance with its business purpose as set forth in its Operating Agreement and Annual Report. It’s business went beyond the ownership, management and development of real estate. The Defendant’s seventeen employees worked exclusively for the Debtor in performing services in the Debtor’s business during 2011, 2012 and 2013. Thus, the work of the Defendant’s employees was outside the scope of the stated business purpose of the Defendant’s business as a real estate holding company. There was no formal sharing arrangement for the services provided by the Defendant’s employees to the Debtor.
The Debtor and the Defendant also did not have a written lease for the premises occupied by the Debtor. Funds were paid by the Debtor to the Defendant in denominated rent, but those amounts varied from year to year. The funds paid as “rent” were booked as payment of the work performed by the Defendant’s employees.
While the court had been careful, earlier in the opinion, to distinguish substantive consolidation from piercing the veil, it also applied certain of the piercing factors as further evidence that substantive consolidation in this instance was appropriate.
Friday, March 3, 2017
Expulsion of Member for Being a Jerk Upheld; Effort to Re-characterize Relationship as a Partnership Rejected
Expulsion of Member for Being a Jerk Upheld;
Effort to Re-characterize Relationship as a Partnership Rejected
Effort to Re-characterize Relationship as a Partnership Rejected
In a decision rendered last year in Illinois, there was affirmed the trial court's determination that a member was expelled for cause. In addition, that same opinion affirmed a summary judgment to the effect that there existed no partnership amongst the members of an LLC. Herrick v. Jumpforward LLC, No. 1-15-3261, 2016 Il. App (1st) 153261-U (Aug. 29, 2016).
Herrick, the plaintiff in this action, joined Jumpforward LLC (the “Company”) as a nonvoting member and at-will employee. The purpose of the Company was to develop a software application by which college coaches and athletes could better negotiate the recruitment process. The founders of the Company, one of whom had been Herrick's college roommate, were former college athletes familiar with the process. In the course of joining the venture, he represented that he had several years of experience in the utilization of several software packages that would be used in developing the web application for which the Company was organized. His initial 20% interest in the Company was structure as 1/3 vesting immediately, 1/3 vesting on the one year employment anniversary and the last 1/3 vesting on the second employment anniversary.
The relationship was not successful. It ultimately came to pass that the representations as to experience with the various software packages were not true. In addition, Herrick did much of the work for the website using software packages that were not effective in achieving the stated aim.
In addition to these technical failures to deliver, the plaintiff became exceptionally difficult to work with in the Company, not responding to internal inquiries and as well refusing to respond to certain important outside customers. He as well engaged in abusive communications to other employees, even after being admonished by more senior officers in the Company. Eventually, Herrick's employment with Jumpforward was terminated. Thereupon, the unvested portion of his interest in the Company was forfeited, and the balance, in accordance with the operating agreement, was redeemed. Herrick challenged both the validity of his termination and the redemption of his interest in the venture. Certain of his claims were dismissed on summary judgment, the balance were all resolved against him at trial. This appeal followed.
The trial court, on summary judgment had dismissed Herrick's assertion that there existed a partnership between him and the defendants such that partnership duties should govern the propriety of the termination of their relationship. After reciting the components of a partnership, the court noted as well that, under controlling Illinois law “[a] complete, valid, written, contract merges and supersedes all prior and contemporaneous negotiations and agreements dealing with the same subject matter.” (Citation omitted). Applying this principle, the court found that the employment and operating agreements to which Herrick had entered both controlled the relationship and did not reflect the formation of a partnership. Rather, “[W]hen they memorialized the relationship in writing, they formed a limited liability company, and not a partnership.” 2016 Il. App. (1st) 153261-U,*9, ¶46.
In addition, the court granted credence to the fact that the operating agreement cited that the parties thereto “disclaimed ‘any intent to form a partnership under the laws of any jurisdiction.’” Id., *10, ¶50.
The Court of Appeals likewise upheld the trial court’s grant of summary judgment with respect to the plaintiff's claims for breach of fiduciary duty. Based upon various case authorities, but curiously without referencing the text of the Illinois LLC Act or any contrary language in the operating agreement, it found that there did not exist a fiduciary relationship between the plaintiff and either Jumpforward LLC or McCombs, the founder.
The Court of Appeals also affirmed the determination that his termination had been for “cause.”
Wednesday, March 1, 2017
Suit Filed in Jefferson Circuit Court to Reverse Articles of Dissolution Filed Without Authority
A lawsuit filed last week in Jefferson Circuit Court highlights to the question of what happens when a business entity filing, in this case articles of dissolution, are filed without authority. Typically, getting that filing out of the public record is going to require a lawsuit.
In Bollinger v. Bollinger, the complaint seeks a declaration of rights effectively revoking articles of dissolution filed with respect to Stoplight Liquor & Deli, LLC. This LLC was formed with three equal members, each of whom was named in the articles of organization. This particular LLC was member-managed, and therefore, under the LLC Act, any member could on the company’s behalf execute and deliver for filing with the Secretary of State articles of dissolution. See KRS § 14A.2-020(b)2; id. § 275.135(1). Under the LLC’s operating agreement, the default statutory rule with respect to voluntary dissolution was retained, namely that the company could be dissolved only with the approval of all of the members. However, notwithstanding that limitation, in May, 2015, one of the members, Jewell Bollinger, unilaterally executed and delivered for filing articles of dissolution. Those articles of dissolution were then filed by the Kentucky Secretary of State. The complaint seeks a declaration that those articles were filed without actual authority and directing the Secretary of State to remove them from the public record, in effect undoing the LLC’s dissolution. In a subsequent pleading, Jewell acknowledges that she did not have authority to file the articles of dissolution, in effect conceding the plaintiff's point. In effect, it appears this is a “friendly lawsuit” structured to yield the necessary ruling for presentation to the Secretary of State.
But what about where there is not the possibility of friendly lawsuit? Assume the person who signed and delivered for filing the articles of dissolution would not cooperate. In that instance the LLC either by means of a direct lawsuit brought by a majority-in-interest of the members or, in the alternative, via a derivative action, would have to sue the person who executed and delivered the articles of dissolution, charging that person with having exceeded their authority and, likely, having breached the operating agreement. Before a decision can be made, even, assuming, that the LLC receives an order that the dissolution should be revoked, it will have incurred significant legal expenses. In the meantime, it may well have endured additional opportunity costs in the way of, for example, other companies refusing to do business with it because of its dissolved status. While damages may be owing to the company for violation of the warranty of authority (see Restatement (Third) of Agency § 8.10), determining with any degree of detail the damages will be difficult. Further, those damages would not include the LLC’s attorney fees and expenses.