LLC Case Law

February 18, 2011 | By | Reply More

Many people think that in an LLC your assets are safe.  In reality, this is not a true statement, Remembering that a lot of statutory and substantive law governing the Limited Liability Company is on state jurisdiction, here are some decisions in LLC case law.

Personal Jurisdiction

If a member has had any transaction in the state of formation of the LLC, then in any civil case may be applied to any person who has held themselves to be a “member” or “manager” of the LLC.  Delaware – Cornerstone Technologies, LLC v. Conrad, No.Civ.A. 19712-NC, 2003 WL 1787959 (Del.Ch. March 31,2003).

Simple Version – If you are a member of an LLC and have conducted business in the state of the origin of the LLC, generally the Long Arm Statute will grant personal jurisdiction over you.

Delaware defines an LLC manager regardless of the title you assign as one who materially participates in the management of the LLC.

Conclusion:  Intellectual property is not 100% protected by LLC.

Alter Ego

If an LLC does not have minimum contracts or does not have an Operating Agreement between the members of the organization, the LLC will be considered an “alter ego.”  Caldwell-Baker Co. v. Southern Illinois Co., 225 F.Supp.2d 1243 (D. Kan. 2002)

Simple Version – When you open your LLC one of the first documents and transactions you  need to prepare is you Operating Agreement.  If you do not then the law may not recognize the “entity”, but rather see it as “persons.”

Alter Ego “Wrong”

Piercing the “corporate veil” in Virginia held that the veil piercing standard required “proof that the alleged alter ego used the corporation to do some legal wrong.”  International Bancorp, L.L.C. v. Societe des Bains de Mer et du Cercle des Entrangers a Monaco

Simple Version – First of all make sure the Operating Agreement is a real document and not something on an Internet template.  Second to keep the corporate veil, keep abiding by the Operating Agreement and do not make personal decisions outside of the agreement.  Piercing the corporate veil means that you will be personally liable.

When Members Sue Members

Here are some of the defenses people make.

Defense – I’m not from the state where the company was incorporated.

Why this won’t hold up in court! You probably met in the state, had correspondence with the state, received money from the company in the state, signed any agreements or Operating Agreement under that state jurisdiction and likely cannot use the Fiduciary Shield Doctrine.  (Minnesota)

Fiduciary Shield Doctrine – a doctrine barring a state from exercising personal jurisdiction over a person who is a non resident defendant for the acts of the corporation or the agent or employee, therefore avoiding fraud.  Not all states adopt this Doctrine.

Defense – I didn’t sign the agreements.

Why this won’t hold up in court! When a person signs an agreement for the LLC regardless of the title they sign they are taking responsibility for the LLC.  The second question is what personal liability does the person have?  This depends on other legal issues, but the company will be liable for the contract signed.

Defense – My partner did not sign the agreement between us.

Why this won’t hold up in court! Two people engage in a business relationship forming an LLC.  The agreements between the partners are never signed.  What will happen if they split up?

If the partners have engaged in transactions the partnership has some level of merger.  If one partner abandoned the other or violates a moral clause the other partner may have recourse or reason to leave the other.  If both parters have met their obligations from a legal perspective then the partnership is likely consummated.  However, if one partner does not perform, then there may be action.

Note that if there are two members in an LLC one cannot close the company without the agreement of the other.  A judge will likely rule that all members must act in good faith towards the laws that govern the company and not with recklessness or abandon of the company.

Diversity Jurisdiction

Defense – I am not responsible for this LLC because it does not reside in my state.

Why that won’t hold up in court! There is a growing body of law that rules that an LLC is a citizen of every state of every member.

In the United States Supreme Court case of Carden v. Arkoma Associates, 494 U.S. 185 (1990). In Carden, the Supreme Court held that a limited partnership is a citizen of every state in which a general or limited partner resides based upon the rule that citizenship of an unincorporated association is determined by the citizenship of all of its members. In one of the first cases to address the issue of an LLC’s citizenship, Carlos v. Adamy, No. 95 C 50264, 1996 WL 210019 (N.D. Ill. April 17, 1996), the court concluded that the corporate “nerve center” test would apply to an LLC, but the subsequent case law has embraced the Carden approach. The Second, Seventh, and Sixth Circuits have applied this rule to LLCs.

What is the Corporate Nerve Center?

In a unanimous decision in Hertz Corp. v. Friend the frontier for determining a companies principle place of business was decided; it is referred to as the corporate “nerve center’, but no used by all states.

A unanimous U.S. Supreme Court in January 2010 held that a corporation’s “principal place of business” for purposes of federal jurisdiction is its “nerve center,” typically where its headquarters is located.

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