Opinion
No. 12-CV-00317 No. 12-CV-00330
01-02-2013
John Reardon v. Mark Plantier and Joseph Bohi and Mark Plantier v. John Reardon
ORDER
In Docket Number 12-CV-00330, the Plaintiffs, Joseph Bohi and Mark Plantier, petition for dissolution of Bumfagon, LLC and seek damages for breach of contract, breach of fiduciary duty, conversion, breach of the covenant of good faith and fair dealing, and quantum meruit. The Defendant, John Reardon, has filed a Motion to Dismiss Plaintiff Plantier as a party asserting that, because he filed for bankruptcy and a bankrupt member of an LLC is automatically dissociated from the LLC upon filing, Plantier does not have standing to move forward with this litigation. The Plaintiffs object. For the following reasons, the Defendant's Motion to Dismiss is GRANTED in part and DENIED in part. Plantier has no standing to maintain an action for dissolution of the LLC because he is no longer a member as a result of his bankruptcy, but as an assignee, he may maintain his claims against Reardon.
I
In ruling on a motion to dismiss, the Court must determine whether the allegations are "reasonably susceptible of a construction that would permit recovery." Bohan v. Ritzo, 141 N.H. 210, 212 (1996). This determination requires the Court to test the facts contained in the complaint against the applicable law. Jay Edwards, Inc. v. Baker, 130 N.H. 41, 44 (1987). In rendering such a determination, the court must assume the truth of all well-pleaded facts alleged by the Plaintiff and construe all inferences in the light most favorable to the Plaintiff. Bohan, 141 N.H. at 213. "[A] plaintiff must . . . plead sufficient facts to form a basis for the cause of action asserted." Mt. Springs Water Co. v. Mt. Lakes Vill. Dist., 126 N.H. 199, 201 (1985). Mindful of this framework, the Court sets forth the following facts in the light most favorable to the Plaintiffs.
The parties are all co-members of Bumfagon, LLC ("Bumfagon"), a New Hampshire limited liability company formed under RSA 304-C. The parties formed Bumfagon sometime in June 2004. The LLC has the primary purposes of land development, timber sale, and lot sales. Plaintiff Bohi was not listed as a member in the LLC's operating agreement, but was treated as a de facto member.
At some point, Plaintiff Plantier filed for Chapter 11 bankruptcy. However, Plantier's membership interest in the LLC was excluded from the bankruptcy procedure. The Trustee in bankruptcy abandoned the asset as having no value to the estate and Plantier signed a reaffirmation agreement of his personal guarantee of a mortgage taken by the LLC. The Bankruptcy Court's Order confirming the plan reinstated the assets that were not sold during the course of bankruptcy back to Plantier.
Bohi and Plaintier filed the instant action alleging breach of contract, breach of fiduciary duty, conversion, breach of the covenant of good faith and fair dealing, and quantum meruit, all of which caused damage to the LLC. They also seek dissolution of the LLC pursuant to RSA 304-C:51. The Defendant seeks dismissal of Plaintiff Plantier on the ground that he filed for Chapter 11 bankruptcy. The Defendant points to RSA 304-C:27, I(b)(2), which provides for a member's dissociation upon a filing of a voluntary petition for bankruptcy. Without a full membership interest, the Defendant contends that Plantier lacks standing to proceed in the instant case.
Plantier argues that even if he is no longer a member of the LLC, because he received no value for his interest, under RSA 304-&41 he "continues to have the rights of an assignee in a limited liability company interest under RSA 304-&46, II". The Defendant contends that if Plantier's voluntary filing for bankruptcy altered his relationship with the LLC to that of assignee, as Plantier contends that it did, then he is only entitled to share in profits and losses, to receive distributions, and to receive allocations of income. Reply to Mark Plantier's Obj. to Mot. Dismiss, paragraph 2 ("Def.'s Reply"); RSA 304-C:41; 46, II. The Complaint, according to the Defendant, does not seek to bring suit to obtain distributions, profits or losses, or allocations of income. Alternatively, the Defendant asserts that even if Plantier still had member rights, the injuries complained of are that of the LLC and not for the individual members to assert.
The Plaintiff, in objection, concedes that his filing for bankruptcy altered his relationship with the LLC to that of assignee, even considering the bankruptcy trustee's rejection of the membership interest and Plantier's reaffirmation of the debt. Nevertheless, the Plaintiff maintains that, as an assignee, he is still entitled "to receive allocations of LLC profits and losses and distributions of LLC cash and other assets." Obj. to Def.'s Mot. to Dismiss Mark Plantier as a Party Pl. ¶ 12 ("Pls.' Obj."). Because the Plaintiffs' allegations affect "profits, distribution, and assets," he asserts that he has alleged sufficient injury and has standing to bring suit. Id. The Court addresses the arguments in turn.
II
First, the Court must resolve the overarching question of whether or not the Plaintiffs may bring suit in their own names despite the fact that the injuries complained of belong directly to the LLC. In reading the Plaintiffs' complaint for damages, it becomes clear that they are seeking redress for the LLC's injuries in all but one of their causes of action.
The Plaintiffs' claim for breach of covenant of good faith and fair dealing is directly attributed to the relationship between Bohi, Plantier, and Reardon.
In their breach of contract claim, the Plaintiffs allege that, under the LLC's operating agreement, the Defendant "had a duty to remain committed, focused, and dedicated to the LLC" and that he "failed to perform these obligations" resulting in the loss of "expected substantial profits and income." Verified Pet'n in Equity for Dissolution of LLC and Compl. for Damages ¶¶ 17, 18. The claim for breach of fiduciary duty similarly focuses on the LLC, alleging that the Defendant "owed the duty of good faith, the care of an ordinarily prudent person . . ., and the tailoring of his actions to promote the best interest of the LLC." Id. ¶ 23. The Complaint further alleges that the Defendant breached these duties by "abandoning the LLC, abandoning his duties to the LLC, breaching his duties as a member and de facto Treasurer of the LLC, and by failing to perform his managerial obligations to the LLC . . . ." Id. ¶ 24. Moreover, the Plaintiffs' conversion claim alleges that the Defendant "spent LLC money on his own matters," converted to his own control LLC property without the consent of the members, and did not "return[]/restor[e] said property to the LLC as obligated." Id. ¶27. Finally, in their claim for quantum meruit, the Plaintiffs allege that the "LLC has incurred certain ongoing insurance, utility, tax, maintenance and other costs which the [the Plaintiffs] paid from personal funds" while the Defendant "used LLC funds to pay" personal debts. Id. ¶34. Based on the foregoing, the majority of the Plaintiffs' claims allege injuries sustained directly to the LLC.
The Defendant is correct that, in most circumstances, "a member of an LLC cannot bring an action in his own name to enforce the rights or redress the injuries of the LLC." Laverty v. Massad, 661 F. Supp. 2d 55, 62 (D. Mass. 2009). Commentators have stated that "for several reasons, providing for derivative suits and requiring that some actions be brought derivatively is an inappropriate rule for the closely held firms for which LLC statutes are primarily designed". 1 RIBSTEIN AND KEATINGE ON LTD. LIAB. COS. § 10:4 (2012). The policies behind requiring a derivative suit on behalf of the LLC rather than a direct suit in a member's name include: (1) the conservation of litigation costs by avoiding separate suits on each members' identical cause of action; (2) avoiding inconsistency "with creditor protection prohibitions on excessive distributions" by allowing direct recovery to members; (3) avoiding the complex process of determining how each individual member was injured and to what damages he is owed; and (4) by recognizing the firm's interest in the suit, the derivative action "preserves some role for the firm's managers and members in terminating the suit." Id.
However, where, as here, the suit involves a closely held LLC, requiring a derivative suit may be inappropriate for several reasons: (1) "in a closely held firm, it is feasible to determine the damages of each member and, therefore, to structure a direct recovery," especially because, in a closely held LLC, a derivative recovery would be controlled by members "rather than by non-member directors as in a corporation" and the suit is not for the benefit of creditors; (2) in a closely held LLC, a derivative recovery may in fact be left in the control of the wrongdoing insiders; (3) "because each member of a closely held firm is likely to have a significant interest, the possibility of strike suits by nominal holders is diminished; and (4) "in a closely held firm, it is feasible to have a suit on behalf of the firm approved by a vote of the disinterested, non-defendant, members." Id.
The New Hampshire Supreme Court has specifically held that the considerations that support requiring shareholders to bring derivative, as opposed to direct, suit against corporate officers may not necessarily apply to closely held corporations where there is a "small number of shareholders and . . . significant overlap between the ownership and management of the corporation." Durham v. Durham, 151 N.H. 757, 761 (2005). "In these circumstances, the formalities of the derivative proceeding may be impractical and unnecessary because the corporation does not have a disinterested board of directors and a multiplicity of suits is unlikely." Id.; see Kessler v. Gleich, 156 N.H. 488, 493 (2007).
An LLC shares many of the characteristics of a closely held corporation. Therefore, although many, if not all, of the Plaintiffs' claims seek redress for injuries belonging directly to the LLC and indirectly affecting the members' interests, a direct claim is still appropriate. The Court notes that all affected members are parties and the suit is not on behalf of any creditors. See generally, Id.; see also, Stoker v. Bellemeade, LLC, 615 S.E.2d 1, 8 (Ga. App. 2005), rev'd on other grounds (one member of an LLC was not required to bring suit against second member derivatively where all members were parties to the suit, there was no danger of multiple suits, a direct suit would prevent defendant member from sharing in the recovery, and there was no evidence of existing creditors); Marsh v. Billington Farms, LLC, 2006 WL 255591 at *11 (R.I. Super. Ct. 2006) (where all members of the LLC were parties, a direct claim is permissible even though the injuries belong to the LLC because there is no risk for a multiplicity of actions and fair distribution of any recovery will not be disturbed).
The Defendant correctly notes that this Court has held that New Hampshire still follows the rigid common law rule preventing partners for bringing actions against one another in the absence of dissolution. Eames v. Bedor, Merrimack Cty. Super. Ct., No. 2012-CV-166 at 7 (May 13, 2012) (McNamara, J.). However, the decision in that case is based upon the fact that the Legislature failed to adopt portions of the Revised Uniform Partnership Act specifically authorizing assertion of legal claims prior to dissolution and accounting. Id. The Court can discern no legislative intent in RSA 304-C to suggest that the rule applicable to closely held corporations, which gives a trial court discretion to allow such claims to proceed, should not be applicable to LLCs, which share many of the aspects of closely held corporations.
Thus, in the circumstances of this case, it is appropriate for the Plaintiff members to proceed with their derivative claims in a direct suit against another member.
III
As Plantier concedes, however, due to his filing for bankruptcy, he is not a member, but an assignee. The precise issue, then, is whether an assignee may bring suit against another member for damages belonging to the LLC.
The New Hampshire LLC Act provides, in relevant part: "A member or members may bring an action in the superior court in the right of a limited liability company to recover a judgment in its favor . . . ." RSA 304-&76 (emphasis added). The Act further provides that an assignee "shall not . . . exercise any rights or powers of a member." RSA 304-&46, I. Further, only members or managers may seek judicial dissolution of an LLC. RSA 304-&51. Therefore, Plantier has no standing to bring a Petition seeking judicial dissolution of Bumfagon, LLC pursuant to RSA 304-&51.
However, an assignee of an LLC membership interest is entitled to receive "distribution or distributions, and to receive such allocation of income, gain, loss, deduction, or credit or similar item to which the assignor was entitled . . . ." RSA 304-C:46, II(a). It is apparent that the claims Plantier seeks to make all relate to the overarching claim that the conduct of Reardon resulted in financial harm to the LLC, which in turn negatively affected the "income, gain, loss, deduction or credit or similar item to which the assignor was entitled". RSA 304-&46, II(a). An assignment is a transfer or making over to another of the whole of any property, real or personal, in possession or in action, or of any State or right therein. Blacks Law Dictionary, (4th Ed 1968). Phile an action could be brought by Plantier against the LLC itself as assignor to enforce his rights, in the unique circumstances of this case—in which a similarly situated member has brought an action to vindicate essentially the same rights—such a procedure would not be consistent with the principles of judicial economy.
It follows that Defendant's Motion to Dismiss Plaintiff Plantier for lack of standing must be GRANTED with respect to Count IV of the Petition which seeks judicial dissolution of the LLC and DENIED with respect to all other Counts.
SO ORDERED.
______________________
Richard B. McNamara,
Presiding Justice