Vague Operating Agreement or Not, LLCs are Not Limited Partnerships or Corporations

Sometimes, LLC cases are a mess. It is often hard to tell whether the court is misstating something, whether the LLCs (and their counsel) are just sloppy, or both.  My money, most of the time is on "both." 

Consider this recent Louisiana opinion (my comments inserted): 

The defendant, Riverside Drive Partners, LLC (“Riverside”) appeals the district court judgment denying its motion for a new trial related to its order of January 8, 2018, dismissing all pending claims against three parties in this multiparty litigation: (1) CCNO McDonough 16, LLC (“CCNO”); (2) R4 MCNO Acquisition LLC (“R4”); and (3) Joseph A. Stebbins, II. After review of the record in light of the applicable law and arguments of the parties, the district court judgment is affirmed. . . .

This litigation arises out of a dispute among partners in a real estate development related to the conversion of an existing historic building into an affordable housing complex. Pursuant to the Operating Agreement signed on September 30, 2013, McDonough 16, LLC, was formed to acquire, rehabilitate, and ultimately lease and operate a multi-family apartment project consisting of the historic building and a new construction building. In turn, McDonough 16, LLC had two members, also limited liability entities: (1) the “Managing Member,” CCNO [an LLC] and (2), the “Investor Member,” R4, a Delaware limited liability company with its principal place of business in New York. [Who cares? Jurisdiction of the LLC is based on the citizenship of the LLC member(s).] Likewise, CCNO had two limited liability partnerships as members: (1) CCNO Partners 2, LLC, [thus not an LLP, but and LLC] which was formed by two members who were residents of and domiciled in Orleans Parish: Mr. Stebbins and Michael Mattax; and (2) the appellant, Riverside, a Florida limited liability company [also not an LLP] with its principal place of business in Florida whose sole member, Jack Hammer, is a resident of and domiciled in Georgia. Iberia Bank was lender for the project.

CCNO McDonough 16, LLC v. R4 MCNO Acquisition, LLC, 2018-0490 (La. App. 4 Cir. 11/14/18), 259 So. 3d 1077, 1078 (comments and emphasis added)

The issue was whether Riverside, LLC, as a member of CCNO, was needed to agree for CCNO to enter a settlement agreement. The court noted,

Section 3. 13 of the CCNO Operating Agreement provides:

Overall Management Vested in Members and Managers. Except as expressly provided otherwise in this Operating Agreement or otherwise agreed in writing at a meeting, management of the Company is vested in the Members in proportion to their initial Capital Contributions, and every Member is hereby made a Manager. All powers of the Company are exercised by or under the authority of the Managers and Members and the business and affairs of the Company are managed under the direction of the Members and Managers. The Managers may engage in other activities of any nature. (Emphasis added).

CCNO McDonough 16, LLC v. R4 MCNO Acquisition, LLC, 2018-0490 (La. App. 4 Cir. 11/14/18), 259 So. 3d 1077, 1079.  One thing not clear from the case is the CCNO is a Louisiana LLC, which I was able to find out via a Louisiana commercial entity search. Louisiana LLC law, by default, provides that members manage the business unless the operating agreement says otherwise.  The operating agreement appears to confirm the members as managers. My read of this provision would be that this provision makes management subject to a vote. That is, I read "management of the Company is vested in the Members in proportion to their initial Capital Contributions" to mean management is decided by a vote in proportion to capital contributions.  It is not intended to mean, I don't think, that actual management is divided by voting rights (e.g., that Member A with 60% voting interest makes 60% of the decisions and Member B with 40% makes 40% of the decisions). If management is by vote, it would appear that CCNO, with at least 60% of the voting interest, could proceed to settlelment without Riverside, LLC. 

 

However, the opinion goes on to explain:

In addition, the CCNO Operating Agreement defines “Majority in Interest” as “any referenced group of Managers, Members or persons who are both, a combination who, in aggregate, own more than fifty percent (50%) of the Membership Interests owned by all of such referenced group of Managers and Members.” Notably, Section 2.05 of the CCNO Operating Agreement specifically provides that any amendment to the agreement requires the approval of the beneficiary of any mortgage lien, i.e., Iberia Bank.

Riverside does not dispute that it owns less than fifty per cent of the CCNO shares or that CCNO Partners 2, of which Mr. Stebbins is a member, owns proportionally more of the membership interest in CCNO. Rather, Riverside asserts that this does not matter because, although the CCNO Operating Agreement clearly established CCNO Partners 2 owned 66.67% of CCNO (and, concomitantly, that Riverside only 33.33%), a subsequent amendment altered the proportion of ownership to 60% (CCNO Partners 2) and 40% (Riverside) and redefined “Majority in Interest” to mean “more than 60%,” thereby making any settlement agreement reached without the appellant's consent invalid.

CCNO McDonough 16, LLC v. R4 MCNO Acquisition, LLC, 2018-0490 (La. App. 4 Cir. 11/14/18), 259 So. 3d 1077, 1079–80.

 

Though this lacks some context, it appears that the court is saying that in defining "Majority in Interest," the operating agreement was telling us what vote was needed to "manage" the LLC.  That might make sense, in that initially the agreement gave CCNO the power to manage because it had more than 50% of the voting interest. Then, apparently, there was an amendment to make a majority vote 60%+1, if properly executed, would have required Riverside's consent to settle. However, the operating agreement also required the mortgage lien beneficiary to approve any amendment, which was not apparently done.  

 

This all seems like it is likely the right outcome, but it sure is hard to piece together. Perhaps all LLC cases should require the court to attach the operating agreement to the opinion. After all, LLC decisions are largely driven by the operating agreement, so it would be helpful for all of us trying to learn from the case to have the full context.  

Two closing thoughts:

1. Jack Hammer as an LLC member of a construction-focused entity sounds like one of my exam characters. Awesome. 
2. Westlaw's synopsis states: "Managing member of limited liability corporation (LLC) brought action against investor member to enjoin removal as manager."  No. An LLC is a limited liability company, not a corporation. (Regular readers had to see that coming.)
3. LLCs are not limited partnerships, either, even if they are structured similarly or even use the term "partner."  An LLC is a separate and unique entity.  Really.