Monday, July 23, 2012

Interest Adverse to the LLC

Connecticut’s Supreme Court Addresses “Adverse” Interest Against LLC

      Under the Connecticut Limited Liability Company Act (Conn. Gen. Stat. § 34-187(b)), “The vote of any member of manager who has an interest in the outcome of the suit that is adverse to the interest of the [LLC] shall be excluded” from any vote as to whether the LLC should bring suit, with the authorization to bring suit generally being made by a majority of interest of the members.  Kentucky has a similar provision in its LLC Act, specifically KRS § 275.335.  The statutes do not, however, identify the standards to apply to determining whether there is such an “adverse” interest.  That is the issue recently addressed by the Connecticut Supreme Court in 418 Meadow Street Associates, LLC v. Clean Air Partners, LLC, SC 18699 (Conn. May 22, 2012).
      418 Meadow Street Associates, LLC (“Meadow”) was, at the time relevant to this action, owned 50% by Barbara Levine, 33.33% by Michael Weinshel and 16.67% by Mark Wynnick.  Meadow owned a building that was in part leased to Clean Air Partners, LLC (“Clean Air”).  While Barbara Levine had no direct ownership interest in Clean Air, her husband Steven was a 20% owner thereof.  A dispute arose between Meadow and Clean Air regarding the lease.  Weinshel and Wynnick proposed that Meadow bring suit against Clean Air.  Barbara Levine, on the other hand, expressly objected to bringing the suit.
      And there arose the conflict.  If Barbara Levine’s interest in Meadow was to be counted, on the basis that she did not have an interest adverse to that of the LLC, Meadow would not have the necessary majority approval to bring suit.  Alternatively, if Barbara’s interest in the LLC were excluded from the calculation, that exclusion being based upon her having an interest adverse to that of the LLC, majority approval was in place.  Both the trial court and the intermediate court of appeals determined that Barbara Levine’s interest was not adverse to that of Meadow, finding she lacked a “proprietary interest” in the defendant.  In turn, the case was appealed to the Supreme Court, which would ultimately reverse both the trial court and the Court of Appeals.
      The Supreme Court characterized the determinations below as follows:
According the trial court, “Barbara Levine is not a party to the action, and she does not have a proprietary interest in [the defendant].  She cannot be assigned an interest in the case simply because she is the wife of a co-owner of the defendant.”  In upholding the trial court’s conclusion, the Appellate Court stated that “the record support[ed] the [trial] court’s finding that … [Barbara Levine’s] husband’s ownership interest was not significant enough to assign her with an interest adverse to the outcome of the action based on their personal relationship alone.”  418 Meadow Street Associates, LLC v. Clean Air Partners, LLC, supra, 123 Conn. App. 422.  Thus, the Appellate Court’s conclusion is slightly different from the conclusion that the trial court reached.  The trial court’s decision suggests that, under the facts of this case, § 34-187(b) would not have excluded Barbara Levine’s vote because she did not have a direct, proprietary interest in the defendant.  Furthermore, the trial court stated that the spousal relationship alone was not enough to support a claim that a member has an interest adverse to the interest of the limited liability company.  The Appellate Court’s decision, on the other hand, suggests that a spousal relationship may be sufficient to support an adverse interest claim in some circumstances, depending on the extend of the spouse’s interest in the defendant company.  In other words, the Appellate Court apparently accepted the proposition that a member’s interest could be considered adverse by virtue of his or her spouse’s interest but that, in the present case, Steven Levine’s interest in the defendant was too minor to Barbara Levine.  We need not address the differences between the trial court’s and the Appellate Court’s decision, however, because our decision turns solely on a matter of statutory interpretation.
Looking to several dictionary entries for “adverse,” the Court found that:
The term “adverse” in § 34-187(b) encompasses any interest of a member that in contrary or opposed to the [LLC’s] interest in the outcome of the litigation ….
We also conclude that when a spouse of a [LLC] member holds an interest or maintains a position of control in a defendant company, as in the present case, that member’s interest properly is considered adverse to the outcome of a lawsuit that the [LLC] brings against the defendant company ….  Simply put, under § 34-187(b), the sweeping scope of the term “adverse” requires that the interests of a member’s spouse be imputed to the member. 

      The Court went on to note that this bright line rule is effective to preclude subsequent recourse to litigation based upon issues such as the magnitude of the spouse’s interest and as well provide clarity against which a contrary rule may, in the operating agreement, be adopted.

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