Notwithstanding Capital Contribution, Person Not a Member of LLC

Notwithstanding Capital Contribution, Person Not a Member of LLC

      In a decision rendered earlier this year by the Supreme Court of Mississippi, it was found that, notwithstanding having contributed some $186,500 to an LLC, the plaintiff was not a member in the company. Kilpatrick v. White Hall On MS River, LLC, No. 2014-CA-0485-SCT, ___ So.3d___, 2016 WL 743667 (Miss. Feb. 25, 2016).

      This dispute arose out of an agreement between five individuals that they would purchase certain land through an LLC in which each would be a member. Capital contributions of each member were set to $500,000.  In order to take advantage of certain favorable price and financial terms, it was necessary at the LLC close on the acquisition by the end of 2007; with the arrival of 2008, the purchase price of the desired real property would increase by nearly 50%. Three of the five gentlemen paid in the money to allow the LLC to make the acquisition.  Kirkpatrick contributed only $100,000 of his $500,000 obligation.  He did, however, pay $84,500 towards the LLC’s bank borrowing.  The Chancery Court found that Kilpatrick was not a member and was not entitled to the $185,000, and this appeal followed.  When the other members and Kilpatrick worked out a variety of payment plans for him, Kilpatrick defaulted on them. Ultimately, Kilpatrick would bring an action for the inspection of the LLC’s books and records, and also claims for the $186,500 he had contributed to the company.

      As to the first point, the decision of the Chancery Court was affirmed.  That affirmance was based largely in fact that the operating agreement provided that each member is to make a capital contribution of $500,000, which Kilpatrick irrefutably never did.  This was found, applying principles of contract law, to control over any reference in the agreement to Kilpatrick as a member.  This determination was buttressed as well by equitable principles. Namely:

To prove his membership interest, Kilpatrick points to the very evidence that exist only because of his own representations to White Hall. He is listed as a member on the exhibits attached to the Operating Agreement and on White Hall’s tax return because of his representations to the other members of the company that he would timely pay his outstanding balance.  In his final judgment, the Chancellor stated that “[h]e who comes into equity must come with clean hands.  He who seeks equity must do equity.”  We agreed.  

      As to the requested return of the $186,500, the court rejected the suggestion that there should be applied a constructive trust to those funds as the LLC had not engaged in any “fraud, duress, wrongdoing, or other unconscionable conduct in denying a membership interest to Kilpatrick.”  Further, those contributions are made towards a membership interest.  While not specifically referenced in this portion of the opinion, the court had previously recited that the operating agreement limited the ability of a member to withdraw contributed capital.  Therefore, those funds are to remain with the LLC.

      There was a dissenting opinion by the Chief Justice of the Mississippi Supreme Court that would have found that Kirkpatrick was a member of the LLC.