Tuesday, March 17, 2015

An Interesting Decision on Diversity Jurisdiction and “Who is a Member?”

An Interesting Decision on Diversity Jurisdiction and “Who is a Member?”

The troubles and travails demonstrating either the absence or the presence of diversity jurisdiction in cases involving LLCs is well known. A decision from last week out of Illinois addresses the interesting question of the evidentiary basis for determining that a person is or is not a member. Cumulus Radio Corp. v. Olson, Case No. 15-CV-1067, 2015 WL 1110592 (C. D. Ill.. March 10, 2015).

The question presented was whether a particular individual, South, was a member of Alpha Media Holdings, LLC, the parent LLC; if she was a member there was not diversity jurisdiction.

South had been awarded a “profit interestin the LLC and was identified as a member in the table to the operating agreement. She had as well received a Form K-1. However, the operating agreement also required “as a condition to receiving a grant of a Profits Unitthat the recipient execute a counterpart thereof, going on to provide that the issuance of a profits interest “shall be effective only after the new Member has executed and delivered to the Company a subscription and assumption determined by the Company.The award agreement cross-referenced this joinder provision of the operating agreement. As described by the Court:
Therefore, the agreement conditions receiving profits units on the fact that a holder will become a Member once she executed a counterpart of the LLC’s Operating Agreement. Id. at * 3 (emphasis in original).

      The counterpart signed by South could not be found, and the LLC admitted it likely did not exist. While the company sought to rely upon extrinsic evidence of its treatment of South as a member, including the Forms K-1, the Court restricted its analysis to the four corners of the operating agreement:

Where the Operating Agreement is unambiguous, however, and provides clear contractual terms that replace the Delaware Act’s default rules, the contract governs and the Court is limited to its four corners.

From there, the Court held:

In this case, the Operating Agreement requires that members admitted pursuant to the issuance of Profits Units sign a counterpart to the Operating Agreement as a condition of membership, and the Court has not been presented with evidence that South has signed such a counterpart. For that reason, the Court concludes for the purpose of subject-matter jurisdiction that South is not a member of Alpha Media Holdings LLC. Therefore, Defendants have not shown that there is not complete diversity between the parties. Id. at * 5.

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