Business Law Chapter 38 Homework Orx Maintains That The Appellants Cannot Prove

568

Chapter 38

Limited Liability Companies

and Special Business Forms

Case 38.1

159 Cal.App.4th 609, 71 Cal.Rptr.3d 608, 08 Cal. Daily Op. Serv. 1374, 2008 Daily Journal D.A.R.

1653

Court of Appeal, Second District, Division 1, California.

02DEVELOPMENT, LLC, Plaintiff and Appellant,

v.

607SOUTHPARK, LLC, Defendant and Respondent.

No. B200226.

Jan. 30, 2008.

CHAPTER 38: LIMITED LIABILITY COMPANIES AND SPECIAL BUSINESS FORMS 569

In opposition to the motion, 02 Development argued that a business entity can enforce pre-organization contracts made for its

benefit. 02 Development also argued that to prove causation it needed to prove only that it would have been able to fund the

purchase of the hotel when required to do so under the contract. Thus, contrary to 607 South Park’s argument, 02 Development

contended that it did not need to prove that it already had the necessary funds, or already had binding commitments from third

parties to provide the funds, when 607 South Park anticipatorily repudiated the contract. All that 02 Development needed to prove

was that it would have been able to obtain the necessary funding (or funding commitments) in order to close the transaction on

time.

The trial court granted the motion and entered judgment in favor of 607 South Park.FN1 02 Development timely appealed.

FN1. The judgment provides for an award of attorney’s fees to 607 South Park in the amount of $289,481.25. None of the

proceedings concerning that award are reflected in the record, so it is impossible for us to determine its basis. That is of

no consequence, however, because our resolution of the merits of the appeal requires reversal of the judgment in its

entirety, including the attorney’s fees award.

*612**610 STANDARD OF REVIEW

Oils v. Pacific Coast Asphalt Co.

(1949) 95 Cal.App.2d 186, 192, 213 P.2d 1 [holding that “a preorganization agreement made for

the benefit of [a] corporation” is “enforceable by [the corporation] after its organization”].) 607 South Park does not argue that

limited liability companies should be treated differently from corporations in this respect, and we are aware of no authority that

would support such a position. 607 South Park’s first ground for its summary judgment motion-that there is no enforceable contract

between 607 South Park and 02 Development because 02 Development did not exist when the assignment agreement was

present evidence of ratification, so the alleged absence of such evidence does not constitute a ground for affirmance. (

Aguilar v.

Atlantic Richfield Co.

(2001) 25 Cal.4th 826, 850-851, 107 Cal.Rptr.2d 841, 24 P.3d 493.)

II. Causation

In the trial court, 607 South Park contended that in order to prove causation 02 Development would have to prove either that it had

the $8.7 million necessary to fund the transaction or that it had legally binding commitments from third parties to provide the

necessary funding. That contention was legally erroneous (see **611

Ersa Grae Corp. v. Fluor Corp.

(1991) 1 Cal.App.4th 613,

FN2. 607 South Park claims that it

never

relied upon that legally erroneous contention. Tellingly, 607 South Park attempts

to support that claim by citing only its

reply

in support of its summary judgment motion. On page seven of its original

memorandum of points and authorities in support of the motion, however, 607 South Park did expressly rely on precisely

the contention we have identified (i.e., that in order to prove causation 02 Development would have to prove either that it

Case 38.2

La.App. 4 Cir.,2010.

ORX Resources, Inc. v. MBW Exploration, L.L.C.

32 So.3d 931, 2009-0662 (La.App. 4 Cir. 2/10/10)

Court of Appeal of Louisiana,

motion for summary judgment in favor of ORX Resources, Inc. (“ORX”). The court held that MBW and Mr. Washauer are liable

in

solido

to ORX for breach of contract, and awarded ORX attorneys fees. For the reasons that follow, we affirm the judgment

determining that Mr. Washauer operated MBW as his alter ego, and allowing ORX to pierce the veil of an LLC.

On January 16, 2003, ORX entered into the “Clovelly Purchase Agreement” with Coastline Oil & Gas, Inc. Pursuant to this

Agreement, ORX purchased certain oil, gas and mineral leases/interests in a tract of land located in Lafourche Parish, known as

Later, ORX submitted an Authorization for Expenditure (“AFE”) to MBW for approval, which Mr. Washauer signed in his own name.

Additionally, he paid MBW’s participation fee with a check drawn from the account of another entity, MBW Properties, LLC.

In 2006, ORX, as the well Operator, began planning the Allain LeBreton Well No. 2 in the Clovelly Prospect, (“the Well”), which

was the “initial well” called for in the Participation Agreement. Adjustments were made in the plan to drill the Well, including the

issuance of a revised AFE, which Mr. Washauer signed on MBW’s behalf. Mr. Washauer paid the full amount of MBW’s share of

1.) the Appellants liable,

in solido,

to ORX in the principal amount of $84,220.01;

2.) awarding reasonable attorneys’ fees in the amount of $43,158.50;

3.) awarding prejudgment and post-judgment interest and court costs, and

4.) awarding all other costs related to the collection of MBW’s unpaid balance.

The Judgment further provided that “ORX’s rights to bring future claims for attorneys’ fees and costs relating to the appeal of this

1. the district court erred in ruling that ORX met its burden of proof to hold Mr. Washauer personally liable for the debts of MBW;

2. the district court erred in ruling that the alter-ego theory of the corporate veil piercing applied to Louisiana limited liability

companies;

and

4. 4the district court erred in awarding ORX $43,158.50 in attorneys fees.

We will not address the Appellants’ assignments of error in the above-referenced order. We will initially discuss what the

Appellants’ have designated as their second assignment of error. Thereafter, the first and third assignments of error will be

discussed together because they both involve Mr. Washauer. Review of the Appellants’ fourth assignment of error will be followed

by our analysis of ORX’s request for attorneys fees. Lastly, we will address the motion to enroll

Louisiana limited liability companies. In support of this argument, the Appellants’ allege the district court erred in applying this

theory in the instant case because theories of veil piercing and/or other mechanisms that attempt to subject LLC members to

personal liability are in direct conflict with Louisiana statutory law.

The Appellants assert that Louisiana’s LLC law does not impose member liability that parallels a shareholder’s potential exposure

created by disregarding certain business formalities; furthermore, the failure to follow certain formalities is not ground for imposing

FN1. La. R.S. 12 § 1320, entitled Liability to third parties of members and managers, states:

A. The liability of members, managers, employees, or agents, as such, of a limited liability company organized and

existing under this Chapter shall at all times be determined solely and exclusively by the provisions of this Chapter.

B. Except as otherwise specifically set forth in this Chapter, no member, manager, employee, or agent of a limited

liability company is liable in such capacity for a debt, obligation, or liability of the limited liability company.

Cir.1977);

Bossier Millwork & Supply Co. v. D. & R. Const. Co., Inc.,

245 So.2d 414 (La.App. 2d Cir.1971)). The Supreme Court

further reasoned that “[i]n order properly to disregard the corporate entity, one of the primary components which justifies piercing

the veil is often present: to prevent the use of the corporate form in the defrauding of creditors.”

Id

., 590 So.2d at 1169 (

citing

Liberto v. Villard,

386 So.2d 930 (La.App. 3d Cir.1980)).

To apply this standard in the instant matter, piercing the veil of an LLC is justified to prevent the use of the LLC form to defraud

1) commingling of corporate and shareholder funds;

2) failure to follow statutory formalities for incorporating and transacting corporate affairs;

3) undercapitalization;

5) failure to hold regular shareholder and director meetings.

Riggins v. Dixie Shoring Co., Inc.,

590 So.2d 1164, 1168 (La.1991) (

citing Kingsman Enterprises v. Bakerfield Elec. Co.,

339 So.2d

1280 (La.App. 1st Cir.1976);

Smith-Hearron v. Frazier, Inc.,

352 So.2d 263 (La.App. 2d Cir.1977),

writ denied,

353 So.2d 1337

(2) payments made by MBW to ORX were made through third parties. MBW Properties, LLC paid the participation fee of

$6,826.00, and Mr. Washauer himself paid the initial cash call of $59,325.00. No payments were made by MBW itself to ORX.

The second

Riggins

factor to be considered is whether Mr. Washauer failed to follow statutory formalities for incorporating and

transacting corporate affairs. Mr. Washauer avers that he complied with all statutory requirements in forming MBW. Under La. R.S.

12:1310, when immovable property is acquired by an individual-who is acting in any capacity for and in the name of any LLC-and

The third

Riggins

factor to be reviewed is whether MBW was undercapitalized. MBW maintains that it was capitalized by the

payments made on its behalf to ORX, and our jurisprudence allows individuals to create minimally capitalized entities like LLCs to

limit their individual liability. ORX avers that MBW never owned any assets apart from its working interest in the Clovelly Prospect

wells. Further, as discussed above, MBW never used its own capital to pay its expenses for this venture. Thus, MBW was not

capitalized at all.

all documents executed between the entities identified MBW as the signatory and indicated that Mr. Washauer was signing the

documents on behalf of MBW. Nothing in the JOA indicated that he was signing said document on his own behalf. Lastly, no

correspondence related to the Clovelly Prospect was sent directly to him, nor did ORX make “cash calls” or AFEs to him

personally. ORX does not dispute that LLC’s are not required to observe the above-referenced formalities. And, in this instance Mr.

Washauer’s admission that he has only held informal MBW meetings and/or discussions on the creation and operation of MBW,

and therefore, he can be held personally liable jointly and solidarily with MBW. These assignments of error are without merit.

[3][4][5] The fourth assignment of error raised by the Appellants is that the district court erred in awarding ORX $43,158.50 in

attorneys fees. District courts are vested with great discretion in arriving at an award of attorneys’ fees.

Filson v. Windsor Court

Hotel,

2007-0755, p. 6 (La.App. 4 Cir. 7/23/08), 990 So.2d 63, 67 (citing

Troth Corp. v. Deutsch, Kerrigan & Stiles, L.L.P.,

06–0457

(La.App. 4 Cir. 1/24/07), 951 So.2d 1162, 1165 (

citing Kem Search, Inc. v. Sheffield,

434 So.2d 1067, 1070 (La.1983))). “The

FN2. Under Rule 1.5 factors to be considered in determining reasonableness are: 1) the time and labor required, the

novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly; 2) the

likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by

the lawyer; 3) the fee customarily charged in the locality for similar legal services; 4) the amount involved and the results

obtained; 5) the time limitations imposed by the client or by the circumstances; 6) the nature and length of the

on the same. It suggests that $17,832 in attorneys fees was incurred by the time its Appellee’s brief was filed with our court, and

that approximately $5,000.00 is owed for presenting oral argument on appeal.

La. C.C.P. art. 2164 provides:

[t]he appellate court shall render any judgment which is just, legal, and proper upon the record on appeal. The court may award

damages for frivolous appeal; and may tax the costs of the lower or appellate court, or any part thereof, against any party to the

Case 38.3

718 N.W.2d 580, 2006 ND 159

SPW ASSOCIATES, LLP, Plaintiff, Appellee and Cross-Appellant

v.

Douglas H. ANDERSON, a/k/a Douglas Anderson, Jim Stockeland, Michael Ceynar, Defendants

andMurdo Cameron, d/b/a Cameron & Sons Aircraft, (f/k/a Flight Training Devices), Defendant,

judgment ordering SPW to sell the airplane.

I

[¶ 2] Cameron is a commercial airline pilot who is interested in the vintage P-51 Mustang airplane. He developed and

manufactured graphite body parts and other components to make replicas of the P-51. He placed advertisements in aviation

magazines seeking someone to design and manufacture additional parts and construct the airplanes.

[¶ 3] Douglas Anderson answered Cameron’s advertisement and, in 1996, Anderson and Cameron entered into a written

[¶ 5] Anderson defaulted on the loan and, on August 18, 1998, signed a “Transfer of Collateral Upon Peaceable Foreclosure and

Renunciation” granting possession of the completed first airplane to SPW. In May 1999, Cameron filed a lien against the airplane

with the FAA. The lien was twice refiled, and was finally recorded on April 28, 2000.

[¶ 6] SPW commenced this action in 2002, seeking a declaratory judgment that it was entitled to possession of the aircraft and

that its security interest was superior to all other liens against the plane. Cameron answered, claiming that his interest in the

venture.

[¶ 8] North Dakota has historically recognized the joint venture relationship. ;

see

; ; . A joint venture is generally considered

akin to a partnership, although more limited in scope and duration, and principles of partnership law apply to the joint venture

relationship.

See

; ; 1 *583 Alan R. Bromberg & Larry E. Ribstein,

Partnership

§ 2.06(a) (2006).

[¶ 9] ., provides that a partner is an agent of, and may bind, the partnership:

(1) contribution by the parties of money, property, time, or skill in some common undertaking, but the contributions need not be

equal or of the same nature; (2) a proprietary interest and right of mutual control over the engaged property; (3) an express or

implied agreement for the sharing of profits, and usually, but not necessarily, of losses; and (4) an express or implied contract

showing a joint venture was formed.

(citations omitted);

see also

. There is no indication that the engine, propellor, and other component parts were to be returned to

intent to keep the airplane in satisfaction of the debt.

See

.

[¶ 19] SPW acquired the airplane when Anderson signed the “Transfer of Collateral Upon Peaceable Foreclosure and

Renunciation,” which granted SPW possession of the airplane and expressly authorized SPW to “sell, use, hold, operate, lease or

578 CASE PRINTOUTS TO ACCOMPANY BUSINESS LAW

otherwise dispose of the collateral” without further notice. The district court found, and Cameron does not dispute, that Anderson

In any case involving consumer goods or any other collateral, a secured party in possession may, after default, propose to retain

the collateral in satisfaction of the obligation. Written notice of such proposal shall be sent to the debtor if the debtor has not

signed after default a statement renouncing or modifying the debtor’s rights under this subsection. In the case of consumer

goods, no other notice need be given. In other cases, notice shall be sent to any other secured party from whom the secured

party has received (before sending the secured party’s notice to the debtor or before the debtor’s renunciation of the debtor’s

V

[¶ 23] We have considered the remaining issues and arguments raised by the parties and they are either unnecessary to our

decision or are without merit. We reverse that portion of the judgment ordering SPW to sell the airplane in a commercially

reasonable manner with notice to all defendants. In all other respects, the judgment is affirmed.

Supplemental Case Printout for:

Insight Into Ethics

v.

In this appeal, we consider whether a member of a limited liability company (“L.L.C.”) may bring a direct action against the

manager of that L.L.C. for an alleged breach of fiduciary duty to the individual member or if such an action must be brought

derivatively on behalf of the L.L.C.

I. Facts and Proceedings Below

O.A.L.L.C. (“O.A.”) was formed in 2000 as a Virginia limited liability company with only two members-David L. Orr (“Orr”) and

Beaumeade acquired a parcel of real property in Loudoun County, Virginia, known as 21785 Filigree Court, Ashburn, Virginia. This

property was Beaumeade’s only asset. Orr opened an investment account in the name of O.A. in early October, 2003. On October

15, 2003 Beaumeade’s property was sold for $2,779,970.99 and the proceeds were deposited in an account for Beaumeade. Orr

directed that the portion of proceeds payable to O.A. from the sale of Beaumeade’s property, $1,384,166.55, be deposited in its

entirety by wire transfer from Beaumeade to O.A.’s investment account on October 16, 2003. These funds from the sale of the

it.

The trial court referred the matter to a commissioner in chancery. The commissioner found that Remora had standing to bring the

action directly and that it did not have to bring suit against Orr derivatively on behalf of O.A. The commissioner also found that the

“sale of the Beaumeade property, the only asset of O.A., was an event of dissolution and disbursement should have taken place.”

Furthermore, the commissioner found “that Orr breached his fiduciary duty as manager of O.A. and wrongfully withheld

disbursement, and is therefore liable in damages to Remora.” The commissioner’s report was filed, and Orr filed exceptions to the

1. The trial court erred in holding that a manager of a limited liability company owes no fiduciary duty to the members of the

company.

3. The trial court erred in holding that a claim by a member of a limited liability company against the manager for breach of

580 CASE PRINTOUTS TO ACCOMPANY BUSINESS LAW

fiduciary duty may only be brought as a derivative action.

4. The trial court erred in holding that when an event of dissolution of the limited liability company has occurred and performance

by the manager of the fiduciary duty breached would result in dissolution of the company, a member may only bring an action

against the manager for breach of fiduciary duty derivatively even though the wrong was directed at the member and only the

member and not the company would benefit from recovery on the claim.

II. Standard of Review

[1][2] The question whether a member or manager of an L.L.C. may be sued directly by a member rather than pursuing a derivative

action on behalf of the L.L.C. is a question of law. The trial court owes no deference to a commissioner’s conclusions of law.

& Jenrette, Inc.,

845 A.2d 1031 (Del.2004), it had standing to bring a direct cause of action against Orr for breach of fiduciary

duties. We disagree.

III. Standing and Fiduciary Duties

duties. However, Remora’s reliance on these two cases is misplaced.

As the United States District Court correctly observed in its interpretation of

Adelman,

the Virginia common law duty owed to the shareholders … by its directors was not a fiduciary duty inuring to each shareholder in

his individual dealings with [the corporation], but was rather a duty attaching only to dealings between the officers and directors

of [the corporation] and the shareholders as a class.

CHAPTER 38: LIMITED LIABILITY COMPANIES AND SPECIAL BUSINESS FORMS 581

individually.

prevents multiplicity of lawsuits by shareholders. A recovery by the corporation protects all shareholders as well as creditors.

Finally, … consistent application of commercial rules promotes predictability. If shareholders and the corporation desire to vary

commercial rules by contract, they are free to do so.

Id.

Our holdings in

Adelman, Glass

and

Simmons

do not support Remora’s contention that we have previously approved direct

causes of action by individual shareholders against directors and should likewise permit such actions by members of an L.L.C.

against a manager.

Additionally, Remora argues that we should adopt the rule established by the Delaware Supreme Court in

Tooley,

providing that

determining whether a stockholder’s claim is derivative or direct … must turn

solely

on the following questions: (1) who suffered

the alleged harm (the corporation or the suing stockholders, individually); and (2) who would receive benefit of any recovery or

other remedy (the corporation or the stockholders, individually)?