333
CHAPTER 38
LIMITED LIABILITY COMPANIES
AND SPECIAL BUSINESS FORMS
ANSWER TO CRITICAL ANALYSIS
QUESTION IN THE FEATURE
INSIGHT INTO ETHICS—CRITICAL THINKING—INSIGHT INTO THE ETHICAL ENVIRONMENT (PAGE 745)
Why wouldn’t a manager always owe a fiduciary duty to the members of an LLC? One would think that
the principle of fiduciary duties by a manger to the members of an LLC would go without saying. But,
there is a difference between a fiduciary duty to the entity—here the LLC—and a fiduciary duty to the
ANSWERS TO QUESTIONS
AT THE ENDS OF THE CASES
CASE 38.1—QUESTIONS (PAGE 741)
THE LEGAL ENVIRONMENT DIMENSION
Why did the appellate court dismiss 607 South Park’s argument that 02 Development should be required
to prove that it had funding commitments for $8.7 million? On a motion for summary judgment, the
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burden of proof is initially on the party who files the motion (607 South Park in this case). The appellate
court pointed out that “607 South Park introduced no evidence to support an argument based on the
proposition of law that 607 South Park is . . . advocating,” which was that 02 Development had to prove
it would have been able to pay the price. Because 607 South Park showed no proof that 02 Development
would have been unable to obtain financing, “the burden of production never shifted to 02
Development to present contrary evidence.”
THE ETHICAL DIMENSION
What might have been some of the reasons that 607 South Park did not agree to sell the property to 02
Development? The owner of the property might have received an offer to buy the property at a higher
CASE 38.2—QUESTIONS (PAGE 743)
1A. One of the advantages of the LLC is that its members enjoy limited personal liability for the
company’s obligations. In view of this fact, does the possibility that a court may hold an LLC member
personally liable for the LLC’s debts reduce the utility of the LLC form of business organization? Explain.
One of the main attractions of the LLC is that it offers limited liability to its owners. If the courts
routinely disregarded the LLC form and held members personally liable, it certainly would diminish the
utility of this organizational form. The courts, though, rarely pierce the veil of an LLC (or a corporation)
and only do so when it would be blatantly unfair to a plaintiff, such as a creditor, to do otherwise.
Because piercing the veil of an LLC is such an unusual occurrence, it is hard to imagine how this
possibility could reduce the overall utility of this business organizational form. Clearly, those who decide
to avail themselves of this form of business must realize that certain requirements must be met if they
2A. What does “jointly and solidarily” (jointly and severally) mean in terms of liability? Would ORX
prefer that Washauer and MBW be held personally liable jointly and severally, rather than that
Washauer alone be held personally liable? Explain. The phrase “joint and several liability” is usually
CASE 38.3—QUESTIONS (PAGE 748)
THE LEGAL ENVIRONMENT DIMENSION
On what basis might Cameron maintain a suit against Anderson? Under the principles of partnership
law, as applied in this case, a partner who acts within his or her scope of authority can bind the
partnership to agreements with third parties. A partner does, however, owe fiduciary duties of care and
loyalty to the partnership and other partners. If Cameron could show that Anderson exceeded the scope
of his authority, Cameron might succeed in a suit against his joint venturer. Also, Anderson’s failure to
tell Cameron about the deal with SPW might support allegations of a breach of fiduciary duty.”
ANSWERS TO QUESTIONS IN THE REVIEWING FEATURE
AT THE END OF THE CHAPTER
1A. LLC tax status
This limited liability company (LLC) would be taxed as a partnership unless it opted to be taxed as a
corporation. With a few exceptions, any LLC with at least two members can choose whether to be taxed
as a partnership or a corporation. (A one-member LLC is taxed as a sole proprietorship unless it chooses
to be taxed as a corporation.) If a firm prefers to be taxed as a corporation, it can check a box on a
federal tax form to indicate this choice. Taxed as a partnership, an LLC would pay no taxes; its profits
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would be “passed through” to its members, who would, however, pay taxes on the profits. The cor-
porate taxing option might be preferable to LLC members who want to reinvest the profits in the
business, because corporate tax rates are often lower than personal tax rates.
2A. LLC management
The LLC in this problem is a member-managed firm—the owners are the managers. In a member-
managed LLC, all members participate in management, and decisions are made by majority vote. In a
manager-managed firm, the members designate managers, who may or may not be members of the
firm.
4A. Contractual liability
A court would probably hold that Davidson Masonry was not bound by the contract that Lafayette
entered. Joint venturers have less implied and apparent authority to bind their venture than partners do
to bind their partnership, because the activities of a venture are more limited than the business of a
partnership. In this situation, Davidson Masonry did not even know of Lafayette’s contract. In other
circumstances, however, a court might hold differently, since courts may apply to joint ventures the
same principles that they do to partnerships. If a court did, it might hold a joint venturer liable for debts
incurred on the venture’s behalf.
ANSWER TO DEBATE THIS QUESTION IN THE REVIEWING FEATURE AT
THE END OF THE CHAPTER
Because LLCs are essentially just partnerships with limited liability for members, all partnership
laws should apply. While there are certainly some differences between how LLCs operate relative to
how partnerships operate, the similarities are sufficiently obvious that no new laws or operating rules
need be created for LLCs, except with respect to the limited liability of LLC members. The law of
partnerships has a long history, one that has created a solid body of case law that should be applied to
LLCs, too.
CHAPTER 38: LIMITED LIABILITY COMPANIES AND SPECIAL BUSINESS FORMS 337
ANSWERS TO QUESTIONS AND CASE PROBLEMS
AT THE END OF THE CHAPTER
38-1A. Limited liability companies
(Chapter 38—Page 744)
Limited liability company (LLC) operating agreements typically state how profits will be divided. An
38-2A. QUESTION WITH SAMPLE ANSWER: Special business forms
Although a joint stock company has characteristics of a corporation, it is usually treated as a partnership.
Therefore, although the joint stock company issues transferable shares of stock and is managed by
38-3A. Diversity jurisdiction and limited liability companies
(Chapter 38—Pages 741–742)
Assuming that the amount in controversy exceeds $75,000, a federal court could exercise jurisdiction in
this case. If Café Olé were a corporation, the owner’s state of citizenship would be irrelevant as to
38-4A. Fiduciary duties
(Chapter 38—Pages 744–745)
A member of a limited liability company (LLC) has a fiduciary duty to act in a manner that he or she
38-5A. Limited liability companies
(Chapter 38—Pages 742–743)
The Delaware court concluded that Shriver and Martinez were the members of Grupo and that “Grupo
was not properly returned to good standing with the State of Delaware.” The court explained that the CF
38–6A. Limited liability companies
(Chapter 38—Pages 742–743)
CHAPTER 38: LIMITED LIABILITY COMPANIES AND SPECIAL BUSINESS FORMS 339
38-7A. CASE PROBLEM WITH SAMPLE ANSWER: Joint venture
The same principles apply to joint ventures as apply to partnerships. Joint venturers owe to each other
the same fiduciary duties, including the duty of loyalty, that partners owe to one another. Thus, as a
38–8A. LLC dissolution
(Chapter 38—Pages 745–746)
No, the appellate court reversed the trial court’s decision. Given the absence of other grounds specified
in the operating agreement for dissolution of a limited liability company, the petitioning member must
38-9A. A QUESTION OF ETHICS: Limited liability companies
(a) A member of an LLC may be held liable for an obligation of the firm, just as a corporate
shareholder may be liable for a corporate obligation. In either situation, if an owner of, or an investor in,
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the firm does not follow statutory formalities, co–mingles funds, or ignores the entity’s articles of
manner, a debt, obligation, or liability of the company solely by reason of being a member or manager of
the limited liability company.”
The appellate court acknowledged that “a corporate officer is personally liable upon a contract
depend[ing] upon the form of the promise and the form of the signature.” Here, “the credit agreement
established that Louis Zacks did not incur personal liability on the account when he signed the credit
indications of discharging any liability under the printing services account.”
Thus, “[i]n summary, . . . Louis Zacks is [not] personally liable to [Gray]. However, we also
conclude that the parties did not modify the printing services account in a manner that excused Blushing
Brides, LLC from paying in full money owed on the printing services account in accordance with terms of
the account.”
2002 issue exceeded the unpaid amount on the firm’s account with Gray. The court stated, “It is a
cardinal rule of contracts that an injured party is under a duty to mitigate its damages and may not
recover those damages which it could have reasonably avoided.” But ‘[t]he rule requiring one injured by
a wrongful act or omission of another to minimize the damages resulting does not require a party to
make extraordinary efforts, or to do what is unreasonable or impracticable.”
38-10A. SPECIAL CASE ANALYSIS: Limited liability companies
Case No. 38.2
ORX Resources, Inc. v. MBW Exploration, LLC
Court of Appeals of Louisiana, 2010.
32 So.3d 931.
(a) Issue: What was the main issue in this case? The issue in this case was whether Louisiana
law allowed the court to “pierce the veil” of the debtor LLC and hold the single shareholder-member of
the LLC personally liable for the LLC’s debt to ORX.
(b) Rule of Law: What rule of law did the court apply? According to the court, Louisiana
statutory law provides that the veil of an LLC can be pierced “when the situation so warrants.” The court
went on to say that “piercing the veil of an LLC is justified to prevent the use of the LLC form to defraud
creditors.” So the rule of law in this instance was that the court could pierce the veil of Washauer’s
company, MBW Exploration, LLC, if the situation warranted such action, and such action was warranted
if Washauer was using the LLC merely to defraud creditors. Specifically, the court identified five
nonexclusive factors to be used in determining whether to apply the alter-ego doctrine, a theory under
which the veil of a corporate entity could be pierced. These factors were the following: the
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meeting in over a year further evidenced that Washauer was operating MBW “at his leisure and
direction.”
(d) Conclusion: What was the court’s conclusion? The court concluded that the trial court