Another LLC Case Dismissed For Failure to Name the Injured Parties to the Suit

Another LLC Case Dismissed For Failure to Name the Injured Parties to the Suit

      In a recent decision from Minnesota, an appeal was dismissed on the basis that the alleged injury was suffered not by the LLC plaintiff, but rather by its individual members. Environmental Trust, LLC v. Hi-Tek Rubber, Inc. No. A15-1942, 2016 WL 4421191 (Minn. Ct. App. Aug. 22, 2016).

      Gordon Cell, the majority owner of Hi-Tek Rubber, Inc., had been pushing the company for a number of years to develop various products.  It was, however, never successful.  In 2007, it was offered a $1 million line of credit by Guaranty Bank of Iowa provided the line of credit was guaranteed. A number of Hi-Tek’s shareholders agreed to guarantee that line of credit. Environmental Trust LLC was organized with those guarantors as its members. Cell, while a “governor” of Environmental Trust, was not a member thereof.  As recited by the court:

According to its Member Control Agreement (MCA), Environmental “was created as a financing tool for Hi-Tek.”  The only members of Environmental were the personal guarantors of the line of credit to fund Hi-Tek.  Each guarantor guaranteed $55,000 as a “contribution.” The MCA provided that the guarantors had no right against Environmental to return any of the funds paid pursuant to the personal guarantees.

      As you can anticipate, things did not go well. Hi-Tek never developed a marketable product, and eventually it suffered an uninsured fire that destroyed portions of its inventory and equipment.  Thereafter, theft and vandalism caused further damage to its facility.  Through all this time, Hi-Tek never executed and delivered to Environmental an otherwise called for promissory note and security agreement.  As such, Environmental, as to Hi-Tek, was an unsecured creditor. Then:

In 2011, Hi-Tek could not pay the interest payments and announced he was going to default on the line of credit.  To prevent default, the guarantors use their personal funds to make interest payments on the loan and to pay off the line of credit.  The total amount of the loan plus interest repaid by Environmental’s members was $675,730.39.  In 2014, Environmental sued Cell for breach of contract, unjust enrichment, breach of statutory and common-law fiduciary duty, conversion, fraud, and intentional and negligent misrepresentation.  A jury found in favor of Environmental on all counts.

       This appeal followed, with Cell arguing that “Environmental lacked standing to sue him in his personal capacity and because Environmental did not suffer an injury.”  The court would find this reasoning persuasive.:

Environmental was never a party to the loan agreement or personal guarantees and never experienced harm or injury related to Cell’s failure to secure the line of credit.  Environmental was not required to pay on the line of credit, and there is no evidence in the record that Environmental experience any negative consequences relating to high Hi-Tek’s ultimate failure to repay the line of credit..... Because Environmental was not a party to the relevant agreements, and because Environmental did not experience and injury-in-fact, Environmental lacked standing to sue Cell.

      In addition, the court discussed Minnesota Statutes § 322B.88, which provides in part that a LLC’s member “is not a proper party to a proceeding by or against [and LLC] except when …. the proceeding involves a claim of personal liability or responsibility of that member and that claim has some basis other than the member’s status as a member.”  Environmental argued this statute should give it standing to pursue the claims on behalf of its members.  The argument was not successful.  Applying the statute, the court found:

Here, Environmental’s members signed personal guarantees relating to their Environmental membership, but not as Environmental members.  The claims pursued by Environmental involve personal liabilities or responsibilities of the guarantors, and were based on the executed personal guarantees, not on their Environmental membership.  Thus, in Minn. Stat. § 322B.88 does not prevent Environmental’s members from suing, and does not grant Environmental standing to sue on their behalf.