Quiz 38: Limited Liability Companies and Special Business Forms
Business
Q 1Q 1
Limited Liability Companies John, Lesa, and Tab?r form a limited liability company. John contributes 60 percent of the capital, and Lesa and Tabir each contribute 20 percent. Nothing is decided about how profits will be divided. John assumes that he will be entitled to 60 percent of the profits, in accordance with his contribution. Lesa and Tabir, however, assume that the profits will be divided equally. Adispute over the profits arises, and ultimately a court has to decide the issue. What' law will the court apply? In most states, what will result? How could this dispute have been avoided in the first place? Discuss fully.
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Case Facts: Mr., L and T has formed a limited liability company with contributions of 60, 20 and 20 percent each. They dispute over the division of profits. Profits Division: In a limited liability corporation whose profit division has not been stated in the operation agreement under the Uniform Limited Liability Company Act (ULLCA) , then state law will determine the division of profits. Usually in the absence of an agreement, states have divided profits equally among the members. Operating Agreement: An operating agreement for an LLC spells out the details of how the business will be managed and operated. Additionally, the terms for settling profits and losses may be specified. Court opinion: The court may determine that the partners will receive an equal division of profits. Courts usually rely on the principles of partnership law. Therefore, in order to avoid the tension of discord between partners it is best to spell out how the company will be managed as well as profit and loss division in an operation agreement.
Q 2Q 2
The city of Papagos, Arizona, had a deteriorating bridge in need of repair on a prominent public roadway. The city posted notices seeking proposals for an artistic bridge design and reconstruction. Davidson Masonry, LLC, which was owned and managed by Carl Davidson and his wife, Marilyn Rowe, decided to submit a bid to create a decorative concrete structure that incorporated artistic metalwork. They contacted Shana Lafayette, a local sculptor who specialized in large-scale metal creations, to help them design the bridge. The city selected their bridge design and awarded them the contract for a commission of $184,000. Davidson Masonry and Lafayette then entered into an agreement to work together on the bridge project. Davidson Masonry agreed to install and pay for concrete and structural work, and Lafayette agreed to install the metalwork at her expense. They agreed that overall profits would be split, with 25 percent going to Lafayette and 75 percent going to Davidson Masonry. Lafayette designed numerous metal sculptures of salmon that were incorporated into colorful decorative concrete forms designed by Rowe, while Davidson performed the structural engineering. The group worked together successfully until the completion of the project. Using the information presented in the chapter, answer the following questions.
Would Davidson Masonry automatically be taxed as a partnership or a corporation?
DEBATE THIS: Because LLCs are essentially just partnerships with limited liability for members, all partnership laws should apply.
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A joint venture resembles a partnership and is taxed like a partnership. For this reason, most courts apply the same principles to joint ventures as they apply to partnerships. Joint ventures owe each other the same fiduciary duties, including the duty of loyalty, that partners owe each other.
Q 3Q 3
QUESTION WITH SAMPLE ANSWER: Special Business Forms.
Bateson Corp. is considering entering into two contracts-one with a joint stock company that distributes home products east of the Mississippi River and the other with a business trust formed by a number of sole proprietors who are sellers of home products on the West Coast. Both contracts will require Bateson to make large capital outlays in order to supply the businesses with restaurant equipment. In both business organizations, at least two shareholders or beneficiaries are personally wealthy, but both organizations have limited financial resources. The owner-managers of Bateson are not familiar with either form of business organization. Because each form resembles a corporation, they are concerned about potential limits on liability in the event that either business organization breaches the contract by failing to pay for the equipment. Discuss fully Bateson's concern.
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Special Business Form: A joint stock company is usually treated like a partnership. This type of company issues transferable share of stock and is managed by directors and officers. The shareholders have personal liability. Shareholders joint stock company's assets are available for damages caused by a breach. Additionally, the individual shareholders' estates are also subject to such liability. Bateson Corporation's contracts will be paid unless state law beneficiaries are treated as partners. That would make them liable to business trust creditors. In that case, Bateson would only be able to recover from business trust assets in the event of breach.
Q 4Q 4
The city of Papagos, Arizona, had a deteriorating bridge in need of repair on a prominent public roadway. The city posted notices seeking proposals for an artistic bridge design and reconstruction. Davidson Masonry, LLC, which was owned and managed by Carl Davidson and his wife, Marilyn Rowe, decided to submit a bid to create a decorative concrete structure that incorporated artistic metalwork. They contacted Shana Lafayette, a local sculptor who specialized in large-scale metal creations, to help them design the bridge. The city selected their bridge design and awarded them the contract for a commission of $184,000. Davidson Masonry and Lafayette then entered into an agreement to work together on the bridge project. Davidson Masonry agreed to install and pay for concrete and structural work, and Lafayette agreed to install the metalwork at her expense. They agreed that overall profits would be split, with 25 percent going to Lafayette and 75 percent going to Davidson Masonry. Lafayette designed numerous metal sculptures of salmon that were incorporated into colorful decorative concrete forms designed by Rowe, while Davidson performed the structural engineering. The group worked together successfully until the completion of the project. Using the information presented in the chapter, answer the following questions.
Is Davidson Masonry member managed or manager managed?
DEBATE THIS: Because LLCs are essentially just partnerships with limited liability for members, all partnership laws should apply.
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Q 5Q 5
Divers Jurisdiction and Limited Liability Companies Joe, a resident of New Jersey, wants to open a restaurant. He asks Kay, his friend, an experienced attorney and a New Yorker, for her business and legal advice in exchange for a 20 percent ownership interest in the restaurant. Kay helps Joe negotiate a lease for the restaurant premises and advises Joe to organize the business as a limited liability company (LLC). Joe forms Café Olé, LLC, and with Kay's help, obtains financing. Then, the night before the restaurant opens, Joe tells Kay that he is "cutting her out of the deal." The restaurant proves to be a success. Kay wants to file a suit in a federal district court against Joe and the LLC. Can a federal court exercise jurisdiction over the parties based on diversity of citizenship? Explain.
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Q 6Q 6
The city of Papagos, Arizona, had a deteriorating bridge in need of repair on a prominent public roadway. The city posted notices seeking proposals for an artistic bridge design and reconstruction. Davidson Masonry, LLC, which was owned and managed by Carl Davidson and his wife, Marilyn Rowe, decided to submit a bid to create a decorative concrete structure that incorporated artistic metalwork. They contacted Shana Lafayette, a local sculptor who specialized in large-scale metal creations, to help them design the bridge. The city selected their bridge design and awarded them the contract for a commission of $184,000. Davidson Masonry and Lafayette then entered into an agreement to work together on the bridge project. Davidson Masonry agreed to install and pay for concrete and structural work, and Lafayette agreed to install the metalwork at her expense. They agreed that overall profits would be split, with 25 percent going to Lafayette and 75 percent going to Davidson Masonry. Lafayette designed numerous metal sculptures of salmon that were incorporated into colorful decorative concrete forms designed by Rowe, while Davidson performed the structural engineering. The group worked together successfully until the completion of the project. Using the information presented in the chapter, answer the following questions.
When Davidson Masonry and Lafayette entered an agreement to work together, what kind of special business form was created? Explain.
DEBATE THIS: Because LLCs are essentially just partnerships with limited liability for members, all partnership laws should apply.
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Q 7Q 7
Fiduciary Duties Westbury Properties, Inc., and others (collectively, the Westbury group) owned, managed, and developed real property. Jerry Stoker and the Stoker Group, Inc. (the Stokers), also developed real property. The Westbury group entered into agreements with the Stokers concerning a large tract of property in Houston County, Georgia. The parties formed limited liability companies (LLCs), including Bellemeade, LLC (the LLC group), to develop various parcels of the tract for residential purposes. The operating agreements provided that "no Member shall be accountable to the [LLC] or to any other Member with respect to [any other] business or activity even if the business or activity competes with the [LLC's] business." The Westbury group entered into agreements with other parties to develop additional parcels within the tract in competition with the LLC group, The Stokers filed a suit in a Georgia state court against the Westbury group, alleging, among other things, breach of fiduciary duty. What duties do the members of an LLC owe to each other? Under what principle might the terms of an operating agreement alter these duties? In whose favor should the court rule? Discuss. [ Stokcr v. Bellemeade, LLC , 272 Ga.App. 817, 615 S.E.2d 1 (2005)]
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Q 8Q 8
The city of Papagos, Arizona, had a deteriorating bridge in need of repair on a prominent public roadway. The city posted notices seeking proposals for an artistic bridge design and reconstruction. Davidson Masonry, LLC, which was owned and managed by Carl Davidson and his wife, Marilyn Rowe, decided to submit a bid to create a decorative concrete structure that incorporated artistic metalwork. They contacted Shana Lafayette, a local sculptor who specialized in large-scale metal creations, to help them design the bridge. The city selected their bridge design and awarded them the contract for a commission of $184,000. Davidson Masonry and Lafayette then entered into an agreement to work together on the bridge project. Davidson Masonry agreed to install and pay for concrete and structural work, and Lafayette agreed to install the metalwork at her expense. They agreed that overall profits would be split, with 25 percent going to Lafayette and 75 percent going to Davidson Masonry. Lafayette designed numerous metal sculptures of salmon that were incorporated into colorful decorative concrete forms designed by Rowe, while Davidson performed the structural engineering. The group worked together successfully until the completion of the project. Using the information presented in the chapter, answer the following questions.
Suppose that during construction, Lafayette had entered into an agreement to rent space in a warehouse that was close to the bridge so that she could work on her sculptures near the site where they would eventually be installed. She entered into the contract without the knowledge or consent of Davidson Masonry. In this situation, would a court be likely to hold that Davidson Masonry was bound by the contract that Lafayette entered? Why or why not?
DEBATE THIS: Because LLCs are essentially just partnerships with limited liability for members, all partnership laws should apply.
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Q 9Q 9
Limited Liability Companies A limited liability company (LLC) sold a Manhattan apartment building that it owned. The owners of 25 percent of the membership interests in the LLC filed a lawsuit on behalf of the LLC-called a derivative suit-claiming that those in majority control of the LLC had sold the building for less than its market value and had personally profited from the deal. The trial court dismissed the suit, holding that the plaintiffs individually could not bring a derivative suit "to redress wrongs suffered by the corporation" because such actions were permitted only for corporations and could not be brought for an LLC. An intermediate appellate court reversed, holding that derivative suits on behalf of LLCs are permitted. That decision was appealed. A key problem for the court was that the state law governing LLCs did not address the issue. How should such matters logically be resolved? Are the minority owners in an LLC at the mercy of the decisions of the majority owners? [ Tzolis v. Wolff , 10 N.Y.3d 100, 884 N.E.2d 1005 (2008)]
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Q 10Q 10
CASE PROBLEM WITH SAMPLE ANSWER: Joint Venture.
Holiday Isle Resort Marina, Inc., operated four restaurants, five bars, and various food kiosks at its resort in Islamorada, Florida. Holiday entered into a "joint-venture agreement" with Rip Tosun to operate a fifth restaurant called "Rip's-A Place for Ribs." The agreement gave Tosun authority over the employees and "full authority as to the conduct of the business." It also prohibited Tosun from competing with Rip's without Holiday's approval but did not prevent Holiday from competing. Later, Tosun sold half of his interest in Rip's to Thomas Hallock. Soon, Tosun and Holiday opened the Okie Florida Steakhouse next to Rip's. Holiday stopped serving breakfast at Rip's and diverted employees and equipment from Rip's to the Steakhouse, which then started offering breakfast. Hallock filed a suit in a Florida state court against Holiday. Did Holiday breach the joint-venture agreement? Did it breach the duties that joint venturers owe each other? Explain. [ Hallock v. Holiday Isle Resort Marina, Inc., 4 So.3d 17 (Fla.App. 3 Dist. 2009)]
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Q 11Q 11
LLC Dissolution Walter Van Houten and John King formed 1545 Ocean Avenue, LLC, with each managing 50 percent of the business. Its purpose was to renovate an existing building and construct a new commercial building. Van Houten and King quarreled over many aspects of the work on the properties. King claimed that Van Houten paid the contractors too much for the work performed. As the projects neared completion, King demanded that the LLC be dissolved and that Van Houten agree to a buyout. Because the parties could not agree on a buyout, King sued for dissolution. The trial court enjoined (prevented) further work on the projects until the dispute was settled. As the ground for dissolution, King cited the fights over management decisions. There was no claim of fraud or frustration of purpose. The trial court ordered that the LLC be dissolved, and Van Houten appealed. Should either of the owners be forced to dissolve the LLC before the completion of its purpose-that is, before the building projects are finished? Explain. [In re 1545 Ocean Avenue, LLC , 893 N.Y.S.2d 590 (N.Y.A.D. 2 Dept. 2010)]
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Q 12Q 12
LLC Management James Williford, Patricia Mosser, Marquetta Smith, and Michael Floyd formed two member-managed limited liability companies- Bluewater Bay, LLC, and Bluewater Logistics, LLC (collectively Bluewater)-in Mississippi to bid on contracts related to the aftermath of Hurricane Katrina. Under Mississippi law, every member of a member-managed LLC is entitled to participate in managing the business. Under Bluewater's operating agreements, "a 75% Super Majority Vote of the members" could redeem any member's interest if the "member has either committed a felony or under any other circumstances that would jeopardise the company status" as a contractor. Bluewater had completed more than $5 million in contracts when Smith told Williford that he was "fired" and that she, Mosser, and Floyd were exercising their "super majority" right to buy him out. No reason was provided. Williford filed a suit in a Mississippi state court against Bluewater and the other members, who then told Williford that they had changed their minds about buying him out but that he was still fired. Did Smith, Mosser, and Floyd breach the state LLC statute, their fiduciary duties, or the Bluewater operating agreements? Discuss. [Bluewater Logistics, LLC v. Williford, 55 So.3d 148 (Miss. 2011)]
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Q 13Q 13
A QUESTION OF ETHICS: Limited Liability Companies.
Blushing Brides, LLC, a publisher of wedding planning magazines in Columbus, Ohio, opened an account with Gray Printing Co. in July 2000. On behalf of Blushing Brides, Louis Zacks, the firm's member-manager, signed a credit agreement that identified the firm as the "purchaser" and required payment within thirty days. Despite the agreement, Blushing Brides typically took up to six months to pay the full amount for its orders. Gray printed and shipped 10,000 copies of a fall/winter 2001 issue for Blushing Brides but had not been paid when the firm ordered 15,000 copies of a spring/summer 2002 issue. Gray refused to print the new order without an assurance of payment. On May 22, Zacks signed a promis sory note payable to Gray within thirty days for $14,778 , plus interest at 6 percent per year. Gray printed the new order but by October had been paid only $7,500. Gray filed a suit in an Ohio state court against Blushing Brides and Zacks to collect the balance. [Gray Printing Co. v. Blushing Brides, LLC, __ N.E.2d __ (Ohio App. 10 Dist. 2006)]
(a) Under what circumstances is a member of an LLC liable for the firm's debts? In this case, is Zacks personally liable under the credit agreement for the unpaid amount on Blushing Brides' account? Did Zacks's promissory note affect the parties' liability on the account? Explain.
(b) Should a member of an LLC assume an ethical responsibility to meet the obligations of the firm? Discuss.
(c) Gray shipped only 10,000 copies of the spring/summer 2002 issue of Blushing Brides' magazine, waiting for the publisher to identify a destination for the other 5,000 copies. The magazine had a retail price of $4.50 per copy. Did Gray have a legal or ethical duty to "mitigate the damages" by attempting to sell or otherwise distribute these copies itself? Why or why not?
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