LLC Members Not Liable to Deceased Member’s Estate; Partnership’s Assets Become LLC’s Upon Conversion

The First District recently examined the nature of a limited liability company (LLC) member’s personal liability and the requirements for converting a general partnership to an LLC.

In Daniel v. Ripoli, 2015 IL App (1st) 122607, a case with a labyrinthine fact pattern, an LLC member’s estate sued an accounting company LLC to recover distributions the estate claimed was owed the deceased member under the LLC operating agreement.

The LLC defended by asserting that the deceased’s distribution amount was permanently reduced before he died by an amendment to the operating agreement.  The trial court entered a money judgment of about $200,000 for the plaintiff and the LLC appealed.

Held: reversed.  The operating agreement’s amendment lessened the deceased member’s distribution amounts from the amendment date forward.

Rules/Reasons:

1/ In Illinois a contract can be modified by express agreement or by conduct.  A contractual modification that’s not expressly agreed to can be ratified by acquiescence in a course of conduct consistent with recognizing the modification;

2/ An LLC provides more insulation from liability for its members than does a corporation for its shareholders;

3/ Under Section 10-10(a) of Illinois’ LLC Act, 805 ILCS 180/10-10(a), LLC members aren’t liable for debts of the LLC unless (1) the articles of organization provide for personal liability; and (2) the member has consented in writing to the adoption of a personal liability provision;

3/ The failure of an LLC to observe usual corporate formalities in connection with the operation of its business is not a basis for imposing personal liability on LLC members or managers;

4/ When a general partnership converts to an LLC, all that’s required is each partner vote for the conversion.  The partnership does not need to also transfer all of its assets to the newly formed LLC;

5/ Once the conversion from partnership to LLC is complete, all debts and assets of the partnership automatically become those of the LLC;

7/ An LLC member can sue the LLC or another member for legal or equitable relief with or without an accounting to enforce the member’s rights under the LLC Act, the operating agreement or any other rights of the member;

8/ The death of an LLC member results in the member’s disassociation from the LLC;

9/ The LLC Act does not allow for a deceased member’s estate to sue the LLC or other LLC members on the deceased member’s behalf;

805 ILCS 180/10-10(a), (c), 180/15-20.

The court held that here, once the accounting general partnership converted to an LLC, the LLC members (who were the erstwhile partners) had no liability to non-members like the plaintiff.

Additionally, the parties’ conduct indicated a mutual recognition that the deceased’s distributions were reduced by the deceased member accepting lesser distributions for several years before he died.  The court then reversed the judgment against the LLC.

Afterwords:

A former LLC member’s estate has no standing to sue an LLC absent legislative decision to the contrary;

A partnership’s assets and liabilities become those of an LLC upon conversion to the LLC form;

Basic contract formation principles apply when determining LLC members’ rights and duties under an operating agreement.

 

 

Apparent Agency, Ratification and Long-Arm Jurisdiction: IL Law

The First District examines a slew of important substantive and procedural litigation issues in Graver v. Pinecrest Volunteer Fire Dept., 2014 IL App (1st) 123006, a commercial lease dispute pitting an Illinois corporation against a Tennessee corporation and an agent of that corporation.

The parties signed a fire truck lease that called for seven years’ worth of monthly payments.

The lease was signed by defendant’s former treasurer who said he had authority to sign on defendant’s behalf.  Plaintiff sued after the defendant defaulted and won an Illinois default judgment against both the corporate and individual defendants of over $92,000.

About fifteen months later, the corporate defendant moved to vacate the judgment under Code Section 2-1401 (for judgments more than 30 days but less than 2 years old).  It claimed the Illinois court lacked personal jurisdiction over it.   The trial court denied the motion and found that defendant  was subject to Illinois long-arm jurisdiction.

The First District reversed.

Holding that the trial court lacked jurisdiction over the Tennessee defendant, the court catalogued the key Illinois jurisdictional rules for foreign defendants:

the plaintiff has the burden of establishing jurisdiction over an out-of-state defendant;

– Code Section 2-209(c) (Illinois’ long-arm statute) provides that an Illinois court can exercise jurisdiction over a foreign defendant if permitted by the Illinois Constitution and the U.S. Constitution;

– Federal due process requires a foreign defendant to have “minimum contacts” with the forum state and to have “purposely availed” itself of the privileges of conducting activities in the forum state;

– Federal due process involves three factors: (1) whether the defendant had minimum contacts such that it had “fair warning” it may be haled into the forum state’s court; (2) the claim against the foreign defendant arose from or is related to the defendant’s contacts with the forum state; and (3) whether it’s reasonable to require the foreign defendant to litigate in another state;

– For Illinois to have general jurisdiction over an out-of-state defendant, the defendant must have “continuous and systematic” business contacts with the forum state;

– Where specific jurisdiction applies, the foreign defendant can only be sued if the action arises from or is related to the defendant’s conduct in the forum state;

– In a breach of contract suit against an out-of-state defendant, the critical jurisdictional factors are (1) who initiated the transaction; (2) where the contract was formed; and (3) where the contract was performed;

– A choice-of-law contractual provision is relevant, but is not by itself a sufficient basis to subject a defendant to jurisdiction in another state.

(¶¶ 13-17).

Applying these rules, the First District found that Illinois lacked jurisdiction over the Tenn. defendant.  First, there was no general jurisdiction since the corporation’s contacts with Illinois were sparse: they weren’t continuous and systematic.  Also, the agent who signed the lease lacked authority to bind the defendant.  It offered an uncontested affidavit that established the agent was never authorized to sign contracts for the defendant.  The court also found that since defendant didn’t know about the lease until after the default judgment was entered, there was no ratification of the agent’s signing the lease.  ¶¶ 19-20.

The Court reversed the trial court’s jurisdiction ruling and voided the judgment against the defendant.

Take-aways: For an out-of-state corporation to be subject to Illinois specific jurisdiction, its contacts with Illinois must form the basis for the lawsuit.  In addition, where a plaintiff is trying to impute an agent’s actions to a corporate principal, the plaintiff must show that the principal said or did something to create in the plaintiff the reasonable belief that the agent could bind the principal.  My question is why didn’t the plaintiff file a counter-affidavit which detailed the actions of the agent and principal which led the plaintiff to assume the agent had authority to bind the principal? It’s not clear whether it would have made a difference; but a counter-affidavit would have at least given the plaintiff a fighting chance.

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