The Northern District of Illinois considers a plethora of signature complex litigation issues in FW Associates, LLC v. WM Associates, LLC, 2019 WL 354953 (N.D.Ill. 2019), the culmination of a years’ long dispute between LLC members over ownership and management of Smart Bar – a company that made an automatic cocktail dispenser [the Smartender].
After a flurry of lawsuits and an arbitration hearing that resulted in a nearly half-million dollar money judgment, the judgment creditor plaintiff brought fraudulent transfer claims against a former LLC member and his family-owned entity to whom the ex-member transferred his Smart Bar ownership interest.
The former member and his family enterprise swiftly countersued to dissolve Smart Bar, to force plaintiff to buy-out the member’s Smart Bar interest, and for conversion of the counter-plaintiff’s distributional interest in Smart Bar.
Granting the plaintiff/counter-defendant’s motion to dismiss all counts of the Counterclaim, the Court first rejected the Counter-Plaintiffs LLC Act claims under Sections 15-20 and 35-1. It held that the individual Counter-Plaintiff lacked standing to sue under the former section as he was no longer a Smart Bar member. The court nixed the counter-plaintiff’s Section 35-1 buy-out claim because he failed to sue the Smart Bar entity as a necessary party defendant. According to the Court, Section 35-1 does not provide an independent basis for a member to sue another member for a buyout.
In rejecting the conversion claim [premised on the claim that Plaintiffs pilfered the individual Counter-Plaintiff’s distributional interest in Smart Bar], the Court focused on the intangible nature of LLC distributions. Illinois courts do not recognize claim for conversion of intangible rights. A conversion action to recover funds based on bare obligation to pay money is not actionable.
Citing another Federal case as precedent, the Court found that a member’s right to LLC distributions was too nebulous to anchor a conversion suit. Conversion requires theft of tangible property or property readily reduceable to cash. Since the expectancy interest in future distributions couldn’t quickly be monetized, the Court found that the claim to future LLC distributions would not support a conversion claim.
The Court then considered Plaintiff’s res judicata and collateral estoppel defenses.
Claim preclusion, or res judicata, applies where (1) there is a final judgment on the merits rendered by a court of competent jurisdiction; (2) an identity of cause of action exists; and (3) the parties or their privies are identical in both actions.
Whether the causes of action are identical turns on whether “they arise from a single group of operative facts, regardless of whether they assert different theories of relief.”
The Court found res judicata did not bar the Counter-claim because there was no identity of causes of action between the earlier arbitration hearing and the instant case. The Court noted that the counterclaim related to facts arising after the arbitration hearing – including the wrongful removal of two Smart Bar board members and plaintiffs’ clandestine purchase of member interests without notice to the counter-plaintiffs. Since the predicate counterclaim allegations involved actions that post-dated the arbitration hearing, the claims were not barred by claim preclusion.
Issue preclusion, a/k/a collateral estoppel, applies where (1) the issue decided in the prior adjudication is identical with the one presented in the suit in question, (2) there was a final judgment on the merits in the prior adjudication, and (3) the party against whom estoppel is asserted was a party or in privity with a party to the prior adjudication.
Here, the court found that there was clearly a final judgment on the merits and the same parties involved.
The Court also found element (1) was satisfied. It ruled that the arbitrator’s ruling on whether the individual defendant/counter-plaintiff breached the Smart Bar Operating Agreement was an identical issue raised in the Federal case. This was so because three counts of the Counterclaim sought to enforce the terms of the Operating Agreement.
Since the counterclaim turned on whether the counter-plaintiff satisfactorily performed his Operating Agreement duties, and the arbitrator ruled definitively that he did not, the counterclaim counts alleging [Smart Bar] Operating Agreement infractions were barred by collateral estoppel/issue preclusion.
To sue for a forced buy-out under Section 180/35-1(b) of the LLC Act, the claimant must name the LLC entity as party defendant. The statute provides no independent basis for an aggrieved LLC member to sue another member.
A conversion suit won’t lie for a member suing to recover a judgment debtor’s LLC distribution. Future and unknown LLC distributions are too ephemeral to support a conversion action. If a distribution isn’t readily reduceable to cash money, the conversion claim will fail.
An arbitrator’s ruling can satisfy the final judgment on merits component of both claim preclusion [res judicata] and issue preclusion [collateral estoppel]