New Developments

South Dakota Supreme Court on LLC dissolution

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.

Delaware Court of Chancery on good faith and the duty of loyalty in a Revlon setting again

The Delaware Court of Chancery has erroneously held that it was correct in its earlier decision to permit a case to survive summary judgment under Stone v. Ritter without facts indicating that the defendants intended to violate a known duty.

 

In Ryan v. Lyondell Chemical Co. (Ryan II) (letter opinion dated August 29, 2008) (HT Francis Pileggi here), Vice Chancellor Noble took 26 pages to decide defendants’ motion for certification of an interlocutory appeal of his earlier decision in the litigation (Ryan I here) (read my post on Ryan I here). The core problem with Ryan I, in my view, was that the Vice Chancellor did not explicitly hold that the defendants knew that they were not discharging their fiduciary duties. I’m guessing that no evidence was presented to him or that the parties did not highlight that element for him in their briefs. In any event, the Vice Chancellor now asserts that Ryan I was correct although he does say that in Ryan I, “the Court perhaps did not expound in sufficient detail. . .” and “. . . the Court was not as clear as it might have been in this regard”.

 

The Vice Chancellor might simply have declared that Ryan I was correct but proceed in Ryan II to fix the errors of the earlier opinion. Had he done so, he wouldn’t have been the first jurist to take that rhetorical approach. However, Ryan II doesn’t correct the problem with Ryan I. Vice Chancellor Noble starts by emphasizing that the directors may well have violated their Revlon duties and then declares (emphasis original), “it is possible to draw the reasonable inference, at least for purposes of denying summary judgment on the current record, that the directors may have consciously disregarded their known fiduciary obligations. . . .” and that “the Defendants may have exhibited a ‘conscious disregard’ for their known fiduciary obligations. . . .”

 

He then “digresses briefly” (if 13 pages can be called brief) to assure us that Ryan I correctly defined “bad faith” per Disney. In this he is definitely correct. Ryan I certainly set out the correct standard, per Stone v. Ritter. I’m assuming that the reason Ryan II dwells on Disney is that the moving papers now argue that he misstated the definition of bad faith in Ryan I. He didn’t. He also correctly fits Disney with Stone and recognizes that to find a duty of loyalty violation via bad faith requires, as it were, specific intent. What he doesn’t do in Ryan II, and didn’t do in Ryan I, was point to any fact establishing director intent other than the undisputed fact that the directors knew Revlon applied, knew what their Revlon obligations required, and did nothing, which arguably (but not definitely) violated Revlon.

 

I don’t think that can be enough for plaintiff to survive summary judgment. The troubling part of Ryan II is that the Vice Chancellor makes much of the fact that this is a motion for summary judgment and, apparently, the motion was made on a record created for litigation in Texas. The defendants surely have the burden of showing that no genuine issue of material fact exists and that they’re entitled to judgment as a matter of law. The court must make every inference against the movants. Without having seen the briefs or, obviously, the underlying record, it seems to me that plaintiff hasn’t put forth any fact from which the court could legitimately infer that the defendants knew they were violating their fiduciary duties. Had there been such a fact, Ryan I would have mentioned it. Even accepting the Vice Chancellor’s explanation that he didn’t feel the need to go into great detail in an opinion denying summary judgment, that doesn’t explain why such a fact wouldn’t have been the centerpiece of Ryan II. The only conclusion I can draw is that the Vice Chancellor is making what is in my view an impermissible inference from the record. I’m guessing the defendants have canvassed the record and demonstrated that nothing therein raises a genuine issue of their intent to violate fiduciary duties. That is, the record does not show that the directors intended their inaction to violate their fiduciary duties. So, the Vice Chancellor has to fall back on the same facts he relied upon on Ryan I but now has to say explicitly, and erroneously, that those facts can support an inference of intent. They can’t.

 

I hadn’t focused on this aspect of the litigational posture, but Ryan I also denied plaintiff’s motion for additional discovery, essentially on the ground that he’d had plenty of time to develop his record. This strikes me as pretty strong circumstantial evidence that the Vice Chancellor didn’t appreciate the importance of defendants’ intent when he wrote Ryan I. Had he had the requisite appreciation, I suspect he would have permitted Ryan to take discovery at least on that point. He didn’t do so. I don’t see any motion by plaintiff to reopen that question but I would think such a motion would be well taken if the Vice Chancellor has any hope of being affirmed should the Supreme Court take the case.

 

Larry Ribstein has a post (here).