RECENT CASES INVOLVING LIMITED LIABILITY …

1 RECENT CASES INVOLVINGLIMITED LIABILITY COMPANIES ANDLIMITED LIABILITY PARTNERSHIPS(includes CASES since the Business Law Section Spring 2008 programsurvey until Nov. 2008; an updated survey is available )Elizabeth S. MillerProfessor of LawBaylor UniversitySchool of LawWaco, Texas 2009 Elizabeth S. Miller, All Rights ReservediiTable of LIABILITY of Se LIABILITY of LIABILITY Jurisdiction Over Members and of to Se of of of LIABILITY of LLC Members and Managers/Personal LIABILITY Under Agency or Veil of Members and of Property/Interest of Duties of Members and and Access to of Operating of Interest/Buy-Out of Contributions and Contribution of , Expulsion, or Termination of and Winding or Administrative LLC - Failure to Qualify to Do LLCs - Constitutionality of Fee or LLC Governing of s s and Local Eligibility and LLC Business Practices of , Merger.

2 Member s Employment Tax LIABILITY /Validity of Check-the-Box Payments as Wages or Salary Subject to IRS LIABILITY , Client CASES INVOLVING LIMITED LIABILITY COMPANIES AND LIMITED LIABILITY PARTNERSHIPSBy Elizabeth S. MillerNovember, 2008 This paper summarizes CASES , as of November, 2008, that have appeared since the paper prepared for thePartnerships and LLCs: Important case Law Developments 2008 program presented at the Spring Meeting of theBusiness Law Section of the ABA. Additional surveys of LLP and LLC CASES may be accessed at the Baylor Law Schoolweb site at LIABILITY of ProcessPDM Steel Service Centers, Inc. v. Mullen & Filippi, No. F054031 (Cal. App.)

3 5 Dist. Aug. 8, 2008). Thethplaintiff attempted service of process on a California LLP by serving an office employee of the LLP. The individual wasnot the registered agent identified in the LLP s registration statement, and the plaintiff failed to establish that theindividual had ostensible authority to accept service of process for the LLP. Therefore, the plaintiff did not comply withthe procedures required for service of process on an parte Burr & Forman, LLP, __ __, 2008 WL 4182829 (Ala. 2008) (pointing out that fact partnershipis LLP does not change its treatment for venue purposes because partnership that registers as LLP is same entity thatexisted before registration and continues to be partnership under Alabama law subject to LLP provisions of partnershipstatute).

4 Se RepresentationMarin v. Gilberg, Civil Action No. V-07-62, 2008 WL 2770382 ( Tex. July 11, 2008) (LLP may not appearpro se). LIABILITY of PartnersSantos v. 304 West 56 Street Realty LLC, 862 435 ( Sup. 2008) (stating complaint must bethdismissed as to general partner of defendant LLP in negligence action since partner of partnership which is LLP is notliable for liabilities of LLP).Red River Wings, Inc. v. Hoot, Inc., 751 206 ( 2008). Two individuals who were partners in anLLP that was a LIMITED partner in LIMITED partnerships that owned franchised restaurants were held liable for the LLP sbreach of fiduciary duty as a LIMITED partner in connection with seizing control of the LIMITED partnerships and oustingthe general partner .

5 The court relied upon the veil piercing provision of the North Dakota LLP statute which states thatprinciples of corporate veil piercing apply to LLPs. The court stated that the evidence of the participation of the LLPpartners in the takeover of the LIMITED partnership in which the LLP was a LIMITED partner supported the trial court simplicit finding that it would be inequitable if the LLP partners acts were treated as those of the LLP alone and that thetrial court did not err in holding the partners of the LLP v. Kuslansky, Robbins, Stechel, and Cunningham, LLP, 858 213 ( 2 ). A withdrawn partner sought to recover payment from the remaining partners for the value of his partnershipinterest under the partnership agreement.

6 The defendant partners argued that they were shielded from LIABILITY by theNew York LLP provisions, but the court pointed out that the New York Court of Appeals held in Ederer v. Gursky that2the LLP LIABILITY shield only applies to a partner s LIABILITY to third parties and does not shield a general partner in an LLPfrom breaches of the partnership s or partner s obligations to each re Rambo Imaging, , No. 07-11190-FRM, 2008 WL 2778846 (Bankr. Tex. July 15, 2008).The issue in this case was whether an individual who was a partner of a Texas LLP was a general partner with standingto be a petitioner in an involuntary bankruptcy case . The partnership was a general partnership registered under theTexas full shield LLP statute.

7 The court stated that it had been unable to find any case law addressing the ability of apartner in an LLP to file an involuntary action, and the court relied upon Collier on Bankruptcy in concluding that thepetitioning general partner should be treated as a shareholder of a corporation under the Bankruptcy Code and thusineligible to be a petitioning partner under Section 303(b)(3). Collier on Bankruptcy takes the position that a full shieldLLP should be treated as a corporation because the definition of a corporation under the Bankruptcy Code broadlyencompasses a partnership association organized under a law that makes only the capital subscribed responsible for thedebts of the association and because, in view of the purpose of Section 303(b)(3), which is to protect general partnerswho are exposed to personal LIABILITY for partnership obligations, it makes sense that Section 303(b)(3) should not beavailable to LLP partners.

8 The court went on to conclude that, even if the petitioning individual was a general partner ,he should be estopped to make that claim because it was clearly inconsistent with the individual s position in priorlitigation in which he claimed to be a LIMITED partner . The court stated that the individual s view of what type of partnerhe was seemed to change as his perceived interest changed, and that is precisely the situation judicial estoppel wasdesigned to LIABILITY JurisdictionFederal courts of appeals and district courts continue to hold that an LLC has the citizenship of each of itsmembers for diversity jurisdiction purposes. The district court opinions to this effect are too numerous to list.

9 A fewdistrict court opinions raising issues of particular interest are noted below. RECENT opinions in which circuit courts ofappeals have applied or recognized the rule that an LLC s citizenship is determined by that of all its members includeHarvey v. Grey Wolf Drilling Co., 542 1077 (5 Cir. 2008) and Metalmark Northwest, LLC v. Stewart, No. 06-th35321, 2008 WL 361039 (9 Cir. Feb. 11, 2008). thIn County of Durham v. Time Warner Entertainment Advance Newhouse Partnership, No. 1:08CV225, 2008WL 4287943 ( Sept. 16, 2008), the court rejected the argument that Series A Members of a Delaware LLC,who exercised no management control and were treated as holders of non-voting preferred stock for federal income taxpurposes, did not represent true ownership and were not members of the LLC for purposes of determining the LLC scitizenship in this diversity case .

10 The court stated that it was not the province of the court to analyze the businessreality of the LLC s structure, and the LLC agreement unambiguously specified that Series A Members together withthe Common Equity Member constituted the Members of the LLC pursuant to the Delaware LIMITED LiabilityCompany Act. The court also held that it was the citizenship of the entity for whose benefit the Series A interest washeld that must be considered rather than the citizenship of the nominee Bond v. Veolia Water Indianapolis, LLC, 571 905 (S. D. Ind. 2008), the court concluded thata Delaware LLC was an unincorporated association under the Class Action Fairness Act provision in 28 1332(d)(10) so that its citizenship for diversity purposes is determined by the state where its principal place of businessis located and the state under whose laws it is organized ( , in the same manner that a corporation s citizenship isdetermined).