CASE 32-4
ESTATE OF COUNTRYMAN v. FARMERS COOP. ASS’N
Supreme Court of Iowa, 2004
679 N.W.2d 598
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Cady, J.
In the afternoon of September 6, 1999, an explosion leveled the home of Jerry Usovsky
(Usovsky) in Richland, Iowa. Tragically, seven people who had gathered in the home to celebrate
the Labor Day holiday died from the explosion. Six others were injured, some seriously. The
likely cause of the explosion was stray propane gas. The survivors and executors of the estates of
those who died eventually filed a lawsuit seeking monetary damages against a host of
defendants. The legal theories of recovery included negligence, breach of warranty, and strict
liability. The defendants included Iowa Double Circle, L.C. (Double Circle) and Farmers
Cooperative Association of Keota (Keota).
Double Circle is an Iowa limited liability company. It is a supplier of propane, and delivered
propane to Usovsky’s home prior to the explosion. Keota is one of two members in Double
Circle. It owns a ninety-five percent interest in the company. The other member is Farmland
Industries, Inc. (Farmland Industries), a regional cooperative. Keota and Farmland Industries
However,
Keota and Double Circle operate as separate entities and maintain separate finances.
Keota moved for summary judgment. * * *
The plaintiffs resisted the motion by pointing to allegations in their petition indicating Keota
participated in the claims of wrongdoing through the management decisions it made in consumer
safety matters. For example, plaintiffs claimed Keota, through Hopscheidt, was negligent in
failing to provide proper warnings to propane users, including the failure to warn users to install
a gas detector, and to properly design the odorant added to the propane. * * *
* * *
Plaintiffs filed their notice of appeal from the summary judgment. * * * They claimed the
district court erred by finding that Keota was insulated from liability as a matter of law. * * *
* * *
The limited liability company, “LLC” as it is now known, is a hybrid business entity that is
considered to have the attributes of a partnership for federal income tax purposes and the limited
liability protections of a corporation. [Citation.] As such, it provides for the operational
The LLC * * * has now been adopted by statute in every state in the nation. [Citation.] Iowa
joined the trend in 1992 with the passage of the Iowa Limited Liability Company Act (ILLCA).
[Citation.] The ILLCA, among other features, permits the owners or members to centralize
management in one or more managers or reserve all management powers to themselves.
[Citations.]
* * *
The[se] rules of liability derived from [the ILLCA] have been summarized as follows:
Sections * * * of the Act generally provide that a member or manager of a limited liability
company is not personally liable for acts or debts of the company solely by reason of being a
member or manager, except in the following situations: (1) the ILLCA expressly provides for
the person’s liability; (2) the articles of organization provide for the person’s liability; (3) the
[Citation.]
* * * While liability of members and managers is limited, the statute clearly imposes liability
when they participate in tortious conduct. [Citation.] This approach is compatible with the
longstanding approach to liability in corporate settings, where, under general agency principles,
corporate officers and directors can be liable for their torts even when committed in their
capacity as an officer. [Citations.] * * *.
Keota suggests that liability of an LLC member or manager for tortious conduct is limited to
conduct committed outside the member or manager role. Yet, this approach is contrary to the
[Citation.] The participation standard is consistent with the principle that members or managers
are not liable based only on their status as members or managers. [Citation.] Instead, liability is
derived from individual activities. Yet, a manager who takes part in the commission of a tort is
liable even when the manager acts on behalf of a corporation. [Citation.] The ILLCA does not
insulate a manager from liability for participation in tortious conduct merely because the conduct
occurs within the scope and role as a manager. * * * The limit on liability created for members
and managers of LLCs in [citation] means members and managers are not liable for company
* * *
We conclude that Keota is not protected from liability if it participated in tortious conduct in
performing its duties as manager of Double Circle. Consequently, the district court improperly
granted summary judgment based on the limited liability provisions of [citation]. A trial is
*** Chapter Outcome ***
Distinguish between a member-managed LLC and a manager-managed LLC.
Duties
Manager-managed LLC — Managers have a duty of care and loyalty; usually
members have no duties to the LLC.
Member-managed LLC — Members have a duty of care and loyalty.
NOTE: See Figure 32-3: Comparison of Member– and Manager-Managed LLCs
Liabilities
No personal liability for LLC’s obligations is incurred by any member or manager
solely by reason of being a member or acting as a manager. The limitation on
liability, however, will not affect the liability of a member or manager who
committed the wrongful act. A member or manager is also personally liable for
any LLC obligations guaranteed by the member or manager.
Dissolution
Will automatically occur upon (1) expiration of the LLC’s agreed duration, (2)
written consent of all the members, or (3) a decree of judicial dissolution.
expulsion, or bankruptcy. Initially, many LLC statutes required an LLC to be
dissolved upon dissociation of a member. Most statutes permitted
nondissociating members by unanimous consent to continue the LLC after a
member dissociates. Some allowed continuation by majority vote. Although
some States still retain these provisions, a number of States and the amended
ULLCA have eliminated a member’s dissociation as a mandatory cause of
dissolution.
Winding Up — A limited liability company continues after dissolution only for
the purpose of winding up its business, which involves completing un3nished
business, collecting debts, disposing of inventory, reducing assets to cash,
Distribution of Assets — default order: (1) to creditors, including members
who are creditors, (2) to members and former members in satisfaction for unpaid
distributions, (3) to members for the return of their contributions, and (4) to
members for their limited liability company interests in the proportions in which
members share in distributions.
CASE 32-5
IN THE MATTER OF 1545 OCEAN AVE., LLC
Appellate Division of the Supreme Court of New York, Second Department, 2010
72 A.D.3d 121, 893 N.Y.S.2d 590
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Austin, J.
[1545 LLC was formed in November 2006 by its two members Crown Royal Ventures, LLC
(Crown Royal) and Ocean Suffolk Properties, LLC (Ocean Suffolk) who executed an operating
agreement that provided for two managers: Walter T. Van Houten (Van Houten), who was a
member of Ocean Suffolk, and John J. King, who was a member of Crown Royal. Each member
of 1545 LLC contributed 50 percent of the capital, which was used to purchase premises known
as 1545 Ocean Avenue in Bohemia, New York on January 5, 2007. 1545 LLC was formed to
purchase the property, rehabilitate an existing building, and build a second building for
commercial rental. Van Houten, who owns his own construction company, Van Houten
Construction (VHC), was permitted to submit bids for the project, subject to the approval of the
managers.
Article 4.12 of the operating agreement entitled, “Regular Meetings,” does not require
meetings of the managers with any particular regularity. Meetings may be called without notice
as the managers may “from time to time determine.”
The managers disagreed about various aspects of the construction work performed on the
LLC property by VHC, which billed 1545 LLC the sum of $97,322.27 for this work. King claims
that he agreed 1545 LLC would pay VHC’s invoice on the condition that VHC would no longer
unilaterally do work on the site. Notwithstanding King’s demand, VHC continued working on
the site. Despite his earlier protests, King did nothing to stop it. The managers also disagreed
about which company to hire to perform environmental remediation work on the site.
Ultimately, King sought to have Ocean Suffolk buy out Crown Royal’s membership in
1545 LLC or, alternatively, to have Crown Royal buy out Ocean Suffolk. Despite discussions
regarding competing proposals for the buyout of the interest of each member by the other
member, no satisfactory resolution was realized. During this period of disagreements, VHC
continued to work unilaterally on the site so that the project was within weeks of completion
Limited Liability Company Law § 702 provides for judicial dissolution as follows:
On application by or for a member, the supreme court in the judicial district in which the office of
the limited liability company is located may decree dissolution of a limited liability company
whenever it is not reasonably practicable to carry on the business in conformity with the articles
of organization or operating agreement (emphasis added).
* * *
* * * Limited Liability Company Law § 702 is clear that * * * the court must first
examine the limited liability company’s operating agreement, [citation], to determine, in light of
the circumstances presented, whether it is or is not “reasonably practicable” for the limited
liability company to continue to carry on its business in conformity with the operating agreement
[citation]. * * *
The operating agreement of 1545 LLC does not contain any specific provisions relating
to dissolution. * * *
Crown Royal argues for dissolution based on the parties’ failure to hold regular meetings,
failure to achieve quorums, and deadlock. The operating agreement, however, does not require
regular meetings or quorums [citation]. It only provides, in article 4.12, for meetings to be held at
such times as the managers may “from time to time determine.” The record demonstrates that the
managers, King and Van Houten, communicated with each other on a regular basis without the
formality of a noticed meeting which appears to conform with the spirit and letter of the
operating agreement and the continued ability of 1545 LLC to function in that context.
* * *
* * * Thus, the only basis for dissolution can be if 1545 LLC cannot effectively operate
under the operating agreement to meet and achieve the purpose for which it was created. In this
case, that is the development of the property which purpose, despite the disagreements between
the managing members, was being met. As the Delaware Chancery Court noted in Matter of
Arrow Inv. Advisors, LLC,
The court will not dissolve an LLC merely because the LLC has not experienced a
smooth glide to profitability or because events have not turned out exactly as the LLC’s
owners originally envisioned; such events are, of course, common in the risk-laden
process of birthing new entities in the hope that they will become mature, profitable
Here, the operating agreement avoids the possibility of “deadlock” by permitting each
managing member to operate unilaterally in furtherance of 1545 LLC’s purpose.
After careful examination of the various factors considered in applying the “not
reasonably practicable” standard, we hold that for dissolution of a limited liability company
pursuant to Limited Liability Company Law § 702, the petitioning member must establish, in the
Mergers and Conversions
Most LLC statutes expressly provide for mergers. A merger of two or more
entities is the combination of all of their assets. One of the entities, known as the
surviving entity, receives title to all the assets. The other party or parties to
the merger, known as the merged entity or entities, is merged into the
surviving entity and ceases to exist as a separate entity.
Many LLC statutes provide for the conversion of another business entity into an
LLC. LLC statutes and other business association statutes also provide for an LLC
to be converted into another business entity. The converted entity remains the
same entity that existed before the conversion.
C. OTHER UNINCORPORATED BUSINESS ASSOCIATIONS
*** Chapter Outcome ***
Distinguish between a limited liability partnership and a limited liability limited partnership.
Limited Liability Partnerships
Is a general partnership that, by making the statutorily required 3ling, limits the
liability of its partners for some or all of the partnership obligations. All of the
States have enacted statutes enabling the formation of limited liability
partnerships (LLPs).
Formalities – General partnership must 3le an application with the Secretary of
State. The RUPA requires a statement of quali3cation. Some states require
unanimous approval from the partners to become an LLP, others require only a
majority. Periodic renewals and reports may be required.
Limited Liability Limited Partnerships
Is a limited partnership that limits the liability of its general partners in the same
way as a LLP.
The new revision of the RULPA promulgated in 2001 provides that a limited
liability limited partnership “means a limited partnership whose certi*cate of
limited partnership states that the limited partnership is a limited liability limited