Wrongful Exclusion from Managing the LLC was Grounds fro Judicial Dissolution
In the Pennsylvania business litigation and business law appellate litigation case of Staiger v. Holohan, PICS Case No. 14-1499 (Pa. Super. Sept. 17, 2014) the Honorable Anne E. Lazarus, writing on behalf of the Pennsylvania Superior Court, ruled that in a judicial dissolution action, plaintiff presented sufficient evidence of his exclusion from management decisions in appealing the judgment of the trial court denying his post-trial motion to remove the judgment of non-suit entered against him.
Plaintiff and defendant were business partners, each with 50 percent ownership of two limited liability companies. Plaintiff provided $165,000 in start up capital for 200 E. Airy, LLC, which was to be repaid within four years.
After 200 E. Airy, LLC had renovated a property; the parties formed Green and Airy, LLC to operate a laundromat on the property. The operating agreements for both LLCs contained identical language giving the members the authority to make business decisions and providing that the decisions of a majority controlled. Plaintiff and defendant also signed a management agreement providing that an unnamed LLC of defendant’s was to manage Green and Airy for a term of years.
The relationship between plaintiff and defendant deteriorated and in 2006, they exchanged emails agreeing to dissolve the partnership. However, they were unsuccessful in negotiating a buy-out agreement. Defendant allegedly refused to repay plaintiff his initial investment, hired legal counsel for the LLCs and paid his personal legal fees, without plaintiff’s consent, from the LLCs’ coffers. Plaintiff alleged he had been “frozen out” from the operations of the LLCs without receiving any return on his investment.
Plaintiff filed a complaint seeking judicial dissolution of the LLCs on Jan. 16, 2007. In 2012, plaintiff filed a motion for summary judgment. The court commenced a bench trial and after plaintiff presented his evidence, defendant moved for a non-suit, which the trial court granted. Plaintiff filed a post-trial motion seeking to remove the non-suit. The trial court granted plaintiff’s post-trial motion, vacated the order granting the non-suit, granted the plaintiff’s motion for summary judgment, appointed a liquidating trustee to dispose of the assets of the LLCs and ordered the LLCs dissolved pursuant to 15 Pa.C.S. 8972. Defendant appealed and the court held the grant of summary judgment was a nullity and remanded the matter to the trial court. The trial court then denied plaintiff’s post-trial motion and reinstated the judgment of non-suit. Plaintiff appealed.
The operating agreements of the LLCs required a majority vote of members to make business decisions. Since plaintiff and defendant were each 50-percent owners, the result was a deadlock and decisions could not be made pursuant to the operating agreements.
Further, plaintiff presented evidence that defendant had consistently made unilateral management decisions, excluding plaintiff from the process. Defendant independently hired legal counsel for the LLCs and caused the LLCs to pay his personal legal fees without plaintiff’s consent. Plaintiff presented sufficient evidence to show that he had been wrongfully excluded from managing the LLCs, which was grounds for dissolution. Therefore the trial court erred in granting a non-suit. Judgment of non-suit reversed and remanded for a new trial.
Reference: Digest of Recent Opinions, Pennsylvania Law Weekly, 37 PLW 935, (September 30, 2014)
Filed Under: Judicial Dissolution of LLC; Wrongful Exclusion from Management Decisions; Business Law
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