Limited Liability Companies

1
Limited Liability Companies

• October 27, 2008
• Casebook - pages 299-327
• Statutes - pages 70-103
• rwargo_at_frigolaw.com

2
The Big Questions of Corporate Governance

• Who is in Charge?
• When push comes to shove, who has the final say
  in making corporate decisions?
• Towards what End?
• When a zero sum decision must be made, whose
  interests prevail?

3
A.P. Smith Mfg. v. Barlow

• New Jersey 1953
• A.P. Smith Mfg donor corporation
• Barlow class representative objecting
  stockholders
• Corporation can make a charitable donation

4
A.P. Smith Mfg. v. Barlow

• Contributed 1,500 to Princetons annual giving
  fund
• Rules of law that emerge?
• Corporate laws adopted subsequent to
  incorporation can affect governance of firm
• The so called reserve power
• X-ref Dartmouth College
• Statute must be in the public interest
• In public interest for corporations to make
  charitable contributions
• Unreasonable amount and/or contribution to pet
  charity would be invalid, apparently.

5
A.P. Smith Mfg. v. Barlow

• Court notes common law rule that charitable
  contributions must benefit corporation. Does
  Barlow retain any requirement of corporate
  benefit?
• Unclear
• Compare loose language in bulk of opinion about
  corporate social responsibility with penultimate
  paragraph
• Also note that statute requires protection of
  corporate interests

6
A.P. Smith Mfg. v. Barlow

• Did corporation benefit?
• Obtain good will in the community by so doing
• Create favorable environment for their business
  operations
• Assuring the free flow of properly trained
  personnel for administrative and other corporate
  employment
• Does giving money to Princetons annual fund
  really help sell fire hydrants?

7
Dodge v. Ford Motor Company

• Michigan 1919
• Ford Motor Company
• Dodge Brothers
• Ford must pay special dividends
• Ford can continue with construction plans

8
Dodge v. Ford Motor Co.

• FMC is hugely successful
• 10M of dividends on 2M investment
• HF is dominant with 58 of the stock
• HF cuts the dividend to 1.2M
• On a 2M investment thats still 60 a year
• Soon FMC has retained earnings 50M
• The Dodge Boys with 10 sue
• What might they want to do with 10 of the 53.8M?

9
Issue and Holding

• What relief were the Dodge boys seeking?
• To require FMC to issue special dividends
• To enjoin the construction of the River Rouge
  plant

• Holding?
• FMC must issue the special dividends
• FMC can continue with its construction plans

10
Rule of Law re Dividends

• What standard of review does court announce re
  dividend decisions?
• Courts will generally leave dividends to the
  discretion of the directors
• But will intervene if refusal to pay amounts to
  such an abuse of discretion as would constitute
  a fraud, or breach of good faith

11
Shareholder Primacy

• Why was Fords decision re dividends improper?
• Ford ran the company as an eleemosynary
  institution
• A business corporation is organized and carried
  on primarily for the profit of the stockholders.
  The powers of the directors are to be employed
  for that end.

12
Dodge v. FMC Rule of Law re Expansion?

• Why did the court decline to enjoin the expansion
  of the plant?
• The judges are not business experts
• Implicates the business judgment rule
• What about duty of care?
• MBCA 8.30(a) Each member of the board of
  directors, when discharging the duties of a
  director, shall act (1) in good faith, and (2)
  in a manner the director reasonably believes to
  be in the best interests of the corporation

13
Application to Ford

• Did Henry Ford reasonably believe that building
  the Rouge River plant was in the best interests
  of FMC?
• We dont know for sure
• Could Henry Ford have reasonably believed that
  building the Rouge River plant was in the best
  interests of FMC?
• Competition with Dodge boys?
• Did the court ask?

14
Shlensky v. Wrigley

• Illinois 1968
• Chicago Cubs
• Philip K. Wrigley majority SH
• Shlensky minority SH
• Business Judgment Rule protects decision not to
  have lights

15
The Limited Liability Company

• Formation
• The Operating Agreement
• Piercing the LLC Veil
• Fiduciary Obligation
• Dissolution

16
Limited Liability Companies

• Cross between partnership and corporation
• Tax advantages of partnerships
• Limited liability of corporations
• None of the restrictions (e.g., number and type
  of shareholders) applicable to S corporations

17
Westec v. Lanham

• Colorado 1998
• Parties
• Westec developer
• Lanham LLC member
• Undisclosed principal
• Preferred Income Investors (LLC)
• Clark acting as agent of Lanham
• Third Party had no notice that PII was an LLC

18
Notice

• Today, LLC filings can be accessed online
• Constructive Notice occurs upon filing

19
History

• LLC is the first new legal business concept since
  the S corp (1950)
• LLCs introduced in Wyoming in 1977
• Created as a vehicle for ownership of real estate
  and development of oil, gas and other mineral
  rights
• The IRS initial position was that LLCs should not
  be treated as a partnership
• In 1988, IRS ruled that LLC could qualify for
  partnership-like tax treatment
• In 1997, IRS further liberalized with check the
  box regulations

20
The Rising Importance of LLCs
21
(No Transcript)
22
The Limited Liability Company

• Funding
• Members typically contribute capital
• Contribution may be cash, property, services
  rendered, a promissory note, or other obligation
  to contribute cash, property, or to perform
  services. ULLCA 401.
• Liability
• Members stand to lose capital contributions, but
  their personal assets are not subject to
  attachment
• Tax Consequence
• Income passes through to members
• LLC does not pay taxes

23
Advantages of Pass Through (Partnership) Taxation
vis-à-vis Corporate Taxation

• Profits are not subject to double taxation
• Losses flow through to owners
• Capital gains flow through to owners and retain
  their tax attributes (i.e., are subject to lower
  rates)
• There is no penalty tax for accumulating profits
  within the entity
• There are fewer negative consequences to
  transfers of assets between the entity and
  owner(s)

24
Formation

• File articles of organization in the designated
  State office. ULLCA 202(a)
• Required and optional contents set forth in ULLCA
  203
• Filing fees and 800 minimum franchise tax
• Other formation tasks
• Choose and register name LLC statutes generally
  require the name of the LLC to include the words
  limited liability company, the abbreviation LLC,
  or similar phrases. ULLCA 105
• Effect of, see Water, Waste Land v. Lanham
• Designate office and agent for service of process
• Draft operating agreement the basic contract
  governing the affairs of a limited liability
  company and stating the various rights and duties
  of the members
• Add need for annual report to tickler list

25
Conversion of existing entities Partnerships

• ULLCA 902 authorizes conversion of partnerships
  or limited partnerships to LLCs
• ULLCA 903 (b)(2) converts debts of partnership
  to debts of LLC
• Per 902(g), however, members remain liable as
  partners vis-à-vis pre-conversion partnership
  debts
• IRS treats conversion as a nonrecognition event

26
Conversion of existing entities Corporations

• No ULLCA provision
• How to effect?
• Hint ULLCA 904(a)
• IRS treats as a potential recognition event
• Tax free reorganization provisions do not apply

27
Elf Atochem v. Jaffari

• Delaware 1999
• Parties
• Elf Atochem (corp.)
• Jaffari
• Malek, LLC
• California arbitration clause selected
• Doesnt matter that LLC didnt sign LLC Agreement

28
Contractarian LLC statutes

• Delaware - CONTRACT IS KING
• 18-1101(a) The rule that statutes in derogation
  of the common law are to be strictly construed
  shall have no application to this chapter
• 18-1101(b) It is the policy of this chapter to
  give the maximum effect to the principle of
  freedom of contract and to the enforceability of
  limited liability company agreements
• California to a lesser extent

29
Members Interest

• A member's rights include
• Financial interest
• I.e., a right to distributions and liquidation
  participation
• Management rights

30
Financial Interests

• Profit and Loss Sharing
• Absent contrary agreement, most statutes allocate
  profits and losses on the basis of the value of
  members' contributions
• Compare partnership laws equal division
• ULLCA 405(a) uses partnership like equal shares
  rule
• Withdrawal
• Member may withdraw and demand payment of his/her
  interest upon giving the notice specified in the
  statute or the LLC's operating agreement

31
Management Rights

• Management
• Absent contrary agreement, each member has equal
  rights in the management of the LLC, ULLCA
  404(a)(1)
• Most matters decided by majority vote, ULLCA
  404(a)(2)
• Significant matters require unanimous consent,
  see ULLCA 404(c)
• E.g., merger, admission of new member,
  dissolution, etc...
• Manager-managed LLC option available, ULLCA
  404(b)
• Can be structured as a board of directors, a
  CEO, or both
• Must be specified in articles of organization

32
Assignment of LLC Interest

• Unless otherwise provided in the LLC's operating
  agreement, a member may assign his financial
  interest in the LLC
• An assignee of a financial interest in an LLC may
  acquire other rights only by being admitted as a
  member of the company if all the remaining
  members consent or the operating agreement so
  provides. See ULLCA 501-503
• Analogous to partnership rules

33
Fiduciary Duties

• Manager-managed LLCs
• The managers of a manager-managed LLC have a duty
  of care and loyalty
• Usually, members of a manager-managed LLC have no
  duties to the LLC or its members by reason of
  being members
• Member-managed LLCs
• All members of a member-managed LLC have a duty
  of care and loyalty
• Derivative Actions
• Member may bring an action on behalf of the LLC
  to recover a judgment in its favor if the members
  with authority to bring the action refuse to do so

34
Liabilities

• No member or manager of a limited liability
  company is obligated personally for any debt,
  obligation, or liability of the limited liability
  company solely by reason of being a member or
  acting as a manager of the limited liability
  company
• But see assignment 23 on veil piercing in the LLC

35
Firm Liability

• 302. Limited Liability Company Liable for
  Members or Managers Actionable Conduct
• A limited liability company is liable for loss or
  injury caused to a person, or for a penalty
  incurred, as a result of a wrongful act or
  omission, or other actionable conduct, of a
  member or manager acting in the ordinary course
  of business of the company or with authority of
  the company.

36
Member/Manager Liability

• 303. Liability of Members and Managers.
• (a) Except as otherwise provided in subsection
  (c), the debts, obligations, and liabilities of a
  limited liability company, whether arising in
  contract, tort, or otherwise, are solely the
  debts, obligations, and liabilities of the
  company. A member or manager is not personally
  liable for a debt, obligation, or liability of
  the company solely by reason of being or acting
  as a member or manager.
• (b) The failure of a limited liability company
  to observe the usual company formalities or
  requirements relating to the exercise of its
  company powers or management of its business is
  not a ground for imposing personal liability on
  the members or managers for liabilities of the
  company.
• (c) All or specified members of a limited
  liability company are liable in their capacity as
  members for all or specified debts, obligations,
  or liabilities of the company if
• (1) a provision to that effect is contained in
  the articles of organization and
• (2) a member so liable has consented in writing
  to the adoption of the provision or to be bound
  by the provision.

37
Member/Manager Liability

• 303. Liability of Members and Managers.
• (a) Except as otherwise provided in subsection
  (c), the debts, obligations, and liabilities of a
  limited liability company, whether arising in
  contract, tort, or otherwise, are solely the
  debts, obligations, and liabilities of the
  company. A member or manager is not personally
  liable for a debt, obligation, or liability of
  the company solely by reason of being or acting
  as a member or manager.
• (b) The failure of a limited liability company
  to observe the usual company formalities or
  requirements relating to the exercise of its
  company powers or management of its business is
  not a ground for imposing personal liability on
  the members or managers for liabilities of the
  company.
• (c) All or specified members of a limited
  liability company are liable in their capacity as
  members for all or specified debts, obligations,
  or liabilities of the company if
• (1) a provision to that effect is contained in
  the articles of organization and
• (2) a member so liable has consented in writing
  to the adoption of the provision or to be bound
  by the provision.

38
Member/Manager Liability

• 303. Liability of Members and Managers.
• (a) Except as otherwise provided in subsection
  (c), the debts, obligations, and liabilities of a
  limited liability company, whether arising in
  contract, tort, or otherwise, are solely the
  debts, obligations, and liabilities of the
  company. A member or manager is not personally
  liable for a debt, obligation, or liability of
  the company solely by reason of being or acting
  as a member or manager.
• (b) The failure of a limited liability company
  to observe the usual company formalities or
  requirements relating to the exercise of its
  company powers or management of its business is
  not a ground for imposing personal liability on
  the members or managers for liabilities of the
  company.
• (c) All or specified members of a limited
  liability company are liable in their capacity as
  members for all or specified debts, obligations,
  or liabilities of the company if
• (1) a provision to that effect is contained in
  the articles of organization and
• (2) a member so liable has consented in writing
  to the adoption of the provision or to be bound
  by the provision.

39
Piercing the Corporate Veil Remember Walkovsky
v. Carlton?
40
Carlton (controlling shareholder)
Tort claim
? Walkovsky
41
Carlton (controlling shareholder)
Tort claim
? Walkovsky
42
Carlton (controlling shareholder)
Limited liability
Tort claim
? Walkovsky
43
Veil Piercing
Carlton (controlling shareholder)
Limited liability
? Walkovsky
44
Kaycee Land v. Flahive

• Wyoming 2002
• Parties
• Flahive Oil Gas LLC tenant
• Kaycee landlord
• No fraud
• Possible to pierce LLC veil, but not always
  appropriate

45
Piercing LLC Veil

• DO NOT ASSUME THAT PIERCING THE VEIL WILL
  AUTOMATICALLY BE A POSSIBLE ANSWER
• Only brought by 3rd parties
• NOT brought by members
• NOT brought by managers

46
Piercing the LLC Veil

• To what extent should the corporate law rules
  apply to LLCs?
• Sometimes statute answers. See, e.g., Tom Thumb.

47
ULLCA v. Minnesota Act

• 303. Liability of Members and Managers . . . A
  member or manager is not personally liable for a
  debt, obligation, or liability of the company
  solely by reason of being or acting as a member
  or manager.

• Minn. Stat. 322B.303(2) case law that states
  the conditions and circumstances under which the
  corporate veil of a corporation may be pierced
  under Minnesota law also applies to limited
  liability companies.

48
Piercing the LLC Veil Tom Thumb

• Minnesota law requires application of corporate
  law standard, which is
• Courts will pierce the corporate veil if (1) an
  entity ignores corporate formalities and acts as
  the alter ego or instrumentality of a shareholder
  and (2) the liability limitations of the
  corporate form results in injustice or is
  fundamentally unfair.

49
Formalities? We Dont Need Formalities!

• Minnesota Courts will pierce the corporate veil
  if (1) an entity ignores corporate formalities
  and acts as the alter ego or instrumentality of a
  shareholder and (2) the liability limitations of
  the corporate form results in injustice or is
  fundamentally unfair.

• ULLCA 303(b) The failure of a limited
  liability company to observe the usual company
  formalities or requirements relating to the
  exercise of its company powers or management of
  its business is not a ground for imposing
  personal liability on the members or managers for
  liabilities of the company.

50
Formalities? We Dont Need Formalities!

• Relevance of formalities?
• Prong one of Minnesota test an entity ignores
  corporate formalities and acts as the alter ego
  or instrumentality of a shareholder
• How to prove alter ego in ULLCA jurisdiction?
• Factors listed in Kaycee
• What is the relevance of the Tom Thumb courts
  reference to the litigants as two experienced
  parties?

51
Veil Piercing under ULLCA

• Absent Minnesota-like statutory command to apply
  corporate standards, should a court do so?
• We can discern no reason, in either law or
  policy, to treat LLCs differently than we treat
  corporations. Kaycee
• Can you?

52
Kaycee

• Do you see a subtle difference between the
  Wyoming LLC statute and the ULLCA?
• Wyoming Neither the members of a limited
  liability company nor the managers of a limited
  liability company managed by a manager or
  managers are liable under a judgment, decree or
  order of a court, or in any other manner, for a
  debt, obligation or liability of the limited
  liability company.
• ULLCA 303(a) A member or manager is not
  personally liable for a debt, obligation, or
  liability of the company solely by reason of
  being or acting as a member or manager.
• Cf. MBCA 6.22(b) a shareholder of a
  corporation is not personally liable for the acts
  or debts of the corporation except that he may
  become personally liable by reason of his own
  acts or conduct

53
McConnell v. Hunt

• Ohio 1999
• Parties
• CHL LLC Columbus NHL Franchise
• McConnell LLC member
• Hunt LLC member
• Operating Agreement permitted competition
• Hunt had unclean hands

54
McConnell v. Hunt Sports Enterprises

• McConnell et al. Local business leaders with
  lots of political pull
• Hunt Kansas City businessman with pro sports
  experience (owns NFL Kansas City Chiefs)
• Form LLC to develop NHL franchise in Columbus,
  Ohio
• Deal runs into trouble
• McConnell takes deal for self

55
Fiduciary Obligation Absent Agreement to the
Contrary

• ULLCA 409(b)
• (b)(1) to account to the company ... for ...
  any property, profit, or benefit ... derived from
  a use by the member of the companys property,
  including the appropriation of a companys
  opportunity
• (b)(3) to refrain from competing with the
  company in the conduct of the companys business
  before the dissolution of the company

56
Taking a Company Opportunity

• Was the NHL Franchise an opportunity of the
  company?
• Where look for analogy?
• In Delaware, a corporate opportunity exists
  where
• Corporation is financially able to take the
  opportunity,
• Opportunity is in the corporation's line of
  business,
• Corporation has an interest or expectancy in the
  opportunity, AND
• Embracing the opportunity would create a conflict
  between directors self-interest and that of the
  corporation

57
Apply Delaware Standard

• Corporation is financially able to take the
  opportunity,
• Opportunity is in the corporation's line of
  business,
• Corporation has an interest or expectancy in the
  opportunity, AND
• Embracing the opportunity would create a conflict
  between directors self-interest and that of the
  corporation

58
Apply Delaware Standard

• Corporation is financially able to take the
  opportunity,
• Opportunity is in the corporation's line of
  business,
• Corporation has an interest or expectancy in the
  opportunity, AND
• Embracing the opportunity would create a conflict
  between directors self-interest and that of the
  corporation

• Interest and Expectancy
• Interest Something to which the firm has a
  better right
• Expectancy Something which, in the ordinary
  course of things, would come to the corporation
• Probably an expectancyfirm formed to look for
  franchise

59
Effect of Operating Agreement

• Contracting out of fiduciary duties
• Partnership law Singer v. Singer UPA (1997)
  103(b)(3)
• Contract may limit but not eliminate duty of
  loyalty
• Limited partnership law
• Jerman v. OLeary Contract did not trump
  fiduciary duty
• But see discussion of Delaware LP statute in Elf
• LLC law McConnell v. Hunt Sports Enterprises?
• an operating agreement of a limited liability
  company may, in essence, limit or define the
  scope of the fiduciary duties imposed upon its
  members

60
LLC Statutory Provisions

• Delaware Code tit. 6, 18-1101(c)(2) fiduciary
  duties and liabilities may be expanded or
  restricted by provisions in a limited liability
  company agreement
• ULLCA 103(b)(2) operating agreement may not
  eliminate the duty of loyalty but may identify
  specific types or categories of activities that
  do not violate the duty of loyalty, if not
  manifestly unreasonable ....

61
LLC Statutory Provisions

• Delaware Code tit. 6, 18-1101(c)(2) fiduciary
  duties and liabilities may be expanded or
  restricted by provisions in a limited liability
  company agreement
• ULLCA 103(b)(2) operating agreement may not
  eliminate the duty of loyalty but may identify
  specific types or categories of activities that
  do not violate the duty of loyalty, if not
  manifestly unreasonable ....

62
Is Section 3.3 of the Agreement Manifestly
Unreasonable?

• ULLCA 103(b)(2) operating agreement may not
  eliminate the duty of loyalty but may identify
  specific types or categories of activities that
  do not violate the duty of loyalty, if not
  manifestly unreasonable ....

• Section 3.3 of the operating agreement Members
  May Compete. Members shall not in any way be
  prohibited from or restricted in engaging or
  owning an interest in any other business venture
  of any nature, including any venture which might
  be competitive with the business of the Company.

63
Analysis Question 2 (Page 322)

• Do you agree that the language of Section 3.3 of
  the operating agreement was clear and
  unambiguous? How might it have been drafted to
  remove all possible doubt in its application to
  this case?
• Boilerplate from real estate deals
• Would they have signed off on a more explicit
  contract?
• If not, wht relevance should that have?

64
Would Section 3.3 of the Agreement be Valid in
California?

• Calif. Corp. Code 17153 The fiduciary duties
  a manager owes to the limited liability company
  and to its members are those of a partner to a
  partnership and to the partners of the
  partnership.
• Applies to members of a member-managed LLC per
  17150.

• Calif. Corp. Code 17005(b) The effect of the
  provisions of this title may be varied as among
  the members or as between the members and the
  limited liability company by the articles of
  organization or operating agreement
• Calif. Corp. Code 17005(d) The fiduciary
  duties of a manager to the limited liability
  company and to the members of the limited
  liability company may only be modified in a
  written operating agreement with the informed
  consent of the members

65
Would Section 3.3 of the Agreement be Valid in
California?

• Calif. Corp. Code 17153 The fiduciary duties
  a manager owes to the limited liability company
  and to its members are those of a partner to a
  partnership and to the partners of the
  partnership.
• Applies to members of a member-managed LLC per
  17150.

• Calif. Corp. Code 17005(b) The effect of the
  provisions of this title may be varied as among
  the members or as between the members and the
  limited liability company by the articles of
  organization or operating agreement
• Calif. Corp. Code 17005(d) The fiduciary
  duties of a manager to the limited liability
  company and to the members of the limited
  liability company may only be modified in a
  written operating agreement with the informed
  consent of the members

66
Would Section 3.3 of the Agreement be Valid in
California?

• Calif. Corp. Code 17153 The fiduciary duties
  a manager owes to the limited liability company
  and to its members are those of a partner to a
  partnership and to the partners of the
  partnership.
• Applies to members of a member-managed LLC per
  17150.

• Calif. Corp. Code 17005(b) The effect of the
  provisions of this title may be varied as among
  the members or as between the members and the
  limited liability company by the articles of
  organization or operating agreement
• Calif. Corp. Code 17005(d) The fiduciary
  duties of a manager to the limited liability
  company and to the members of the limited
  liability company may only be modified in a
  written operating agreement with the informed
  consent of the members

67
Would Section 3.3 of the Agreement be Valid in
California?

• Calif. Corp. Code 17153 The fiduciary duties
  a manager owes to the limited liability company
  and to its members are those of a partner to a
  partnership and to the partners of the
  partnership.

• Calif. Corp. Code 16103 (UPA) The partnership
  agreement may not do any of the following ...
• (3) Eliminate the duty of loyalty ..., but, if
  not manifestly unreasonable, may do either of the
  following
• (A) The partnership agreement may identify
  specific types or categories of activities that
  do not violate the duty of loyalty.

68
Would Section 3.3 of the Agreement be Valid in
California?

• Calif. Corp. Code 17153 The fiduciary duties
  a manager owes to the limited liability company
  and to its members are those of a partner to a
  partnership and to the partners of the
  partnership.

• Calif. Corp. Code 16103 (UPA) The partnership
  agreement may not do any of the following ...
• (3) Eliminate the duty of loyalty ..., but, if
  not manifestly unreasonable, may do either of the
  following
• (A) The partnership agreement may identify
  specific types or categories of activities that
  do not violate the duty of loyalty.

69
Analysis Question 1

• Suppose that Hunt, with the approval of all the
  other members of CHL, had been negotiating with
  Nationwide and was near an agreement and that
  McConnell had then made a good offer to
  Nationwide and secured the right to lease the
  arena and, with that in hand, had secured the
  franchise. What result?
• Much stronger expectancy. Strengthens case that
  this is a LLC opportunity
• Cf. Singer v. Singer Court held similar contract
  intended to promote spirited, if not outright
  predatory competition between the partners
• Might be tortious interference issue though

70
Dissociation v. Dissolution

• Dissociation
• Withdrawal or expulsion of a member (ULLCA 601)
• Dissolution
• Winding up of LLC triggered (ULLCA 801)
• Unlike UPA (1914), dissociation does not
  necessarily lead to dissolution

71
Dissociation Without Dissolution

• Dissociated members interest must be purchased
  by the LLC (ULLCA 701)
• Judicial appraisal proceeding available (ULLCA
  702)
• Members right to participate in firm business
  terminates (ULLCA 603(b)(1))
• Exception for participation in a post-dissolution
  winding up process (ULLCA 603(b)(2))

72
Events of Dissolution

• By operation of law
• Upon the happening of any event specified in LLC
  operating agreement
• In Simpsons, operating agreement triggered
  dissolution upon resignation
• Vote of members (as specified in operating
  agreement)
• It becomes unlawful to carry on the business
• Upon court order
• Economic purpose frustrated
• Misconduct by members

73
Consequences of Dissolution Absent Contrary
Agreement
Business dissolved per 802(a) Business must be
wound up Any member who did not wrongfully
dissolve may participate in winding up
Dissolution 801
Business continued per 802(b) Requires
unanimous consent Makes clear that disassociated
member entitled to vote Purchase of disassociated
partners interest ( 701)
74
New Horizons v. Haack

• Wisconsin 1999
• Parties
• Kickapoo Valley Freight LLC
• Allison Haack member
• New Horizons Supply Cooperative contractor
• Trial Court Treated as a Partnership
• Not Properly Dissolved

75
New Horizons v. Haack

• Review
• Alter ego/veil piercing
• Trial court treats firm as a partnership
• Appeals court treats firm as a LLC
• Actually a very complicated issue
• If no LLC formed, what kind of business was it?
• A partnership
• So treat it like one
• LLC version of de facto corporation doctrine?

76
New Horizons v. Haack

• Review
• Alter ego/veil piercing
• Trial court treats firm as a partnership
• Appeals court treats firm as a LLC
• Actually a very complicated issue
• If LLC was formed, why does court not require
  evidence thereof?
• If LLC was formed, tax treatment is irrelevant
• Fact that it was run informally (i.e., like a
  partnership) ? per se veil piercing

77
New Horizons v. HaackAnalysis Questions

• What result if Haack had filed articles of
  dissolution?
• Quasi-bankruptcy proceeding in which creditors
  file claims that then must be satisfied out of
  LLC assets
• Analysis question 3
• 500 (i.e., amount of distribution)
• Analysis question 2
• Guarantee?

78
LLC Summary

• Same Issues as Other Business Entities
• Formation
• Fiduciary Duties of Management
• Duty of Care
• Duty of Loyalty
• Control Management vs. Owners
• Dissolution

79
LLC Summary

• Partnership Similarity
• Tax purposes
• Member-managed LLCs possible similar fiduciary
  duties
• Corporation Similarity
• Most non-tax concepts
• Manager-managed LLCs

80
Practice Question 1

• Suffragettes

81
Practice Question 2

• CardinalCo

82
Next Class November 3, 2008

• Corporations Duty of Care
• Casebook pages 328-373
• Statutes pages 113-118, 203-213
• Coming up
• November 10 Duty of Loyalty (374-412, 11-67)
• November 17 Practice Exams
• November 24 Midterm Review
• December 1 - MIDTERM