The Supreme Court of South Dakota has held that an LLC may be dissolved when two of four members refuse to renegotiate the terms of an agreement between the LLC and those two members.
In Kirksey v. Grohmann, four sisters were left equal ownership interests in a ranch when their mother died in 2001. The ranch had been in the family for over 100 years. They formed an LLC the next year to hold title to the ranch. They did so for tax advantages, to keep the land within the family, and to keep the land out of the hands of the sisters’ spouses. Ms. Grohmann, the eldest, lived on the land and was named manager. Ms. Randell, the next oldest, lived on the land, as well. All four decided that the LLC would lease the land to Grohmann, Randell, and Ms. Kirksey (a third sister), who owned grazing livestock on the land. The fourth sister, Ms. Ruby, neither lived on the land nor grazed livestock on it. The lease was for about $14,000 per year and netted about $4,000 after taxes and insurance. Grohmann and Randell quickly fell out with Kirksey and Ruby and Kirksey sold her livestock to Grohmann and Randell in 2003. Apparently, the land increased in value by a factor of six but the lease payments were fixed. The operating agreement required a majority vote to take action and the sisters were deadlocked as to any action that would change the status quo either by changing the lease terms or by dissolving. Kirksey and Ruby sued for dissolution, which the trial court denied.
Justice Konenkamp held that dissolution was warranted under the South Dakota LLC Act, which in pertinent part is identical to the 1996 ULLCA. That act provides for court ordered dissolution when, inter alia, “the economic purpose of the company is likely to be unreasonably frustrated” or “it is not otherwise reasonably practicable to carry on the company’s business in conformity with the articles of organization and the operating agreement”. The complaint apparently did not seek dissolution on the ground of illegal, oppressive, fraudulent, or unfairly prejudicial conduct, though it seems clear from the briefs that such a claim could at least have been made, if not ultimately proven. Nor did the complaint seek damages for breach of fiduciary duty.
After canvassing a number of states’ interpretation of the “not reasonably practical” standard, the court held that the economic entity of the ranch could be continued but that leaving de facto control in Grohmann and Randell, who refuse to change the terms of the lease favorable to them, is not reasonably practical in light of the operating agreement. The court suggested that Kirksey and Ruby knew of the favorable terms when they entered into the original lease and surely knew the terms of the operating agreement. Justice Konenkamp also held that that the economic purpose of the LLC is likely to be unreasonably frustrated, essentially for the same reasons.
Although the court does not speak in terms of fiduciary duties, the subtext seems to be that Grohmann and Randell had some sort of obligation to renegotiate the terms of the lease so that the other two sisters could share equitably (perhaps equally?) in the economics of the enterprise. It seems not to matter that Kirksey and Ruby willingly agreed both to the LLC operating agreement and to the lease terms. A deal isn’t a deal if it turns out to be too good a deal.
Apparently, the land increased in value by a factor of six but the lease payments were fixed.
Daniel Ferris
Posted by: Direct response services | April 29, 2010 at 10:55 AM