Seventh Circuit Files: Court Voids LLC Member’s Attempt to Pre-empt LLC’s Suit Against That Member

In Carhart v. Carhart – Halaska International, LLC, (http://law.justia.com/cases/federal/appellate-courts/ca7/14-2968/14-2968-2015-06-08.html) the plaintiff LLC member tried to shield himself from a lawsuit filed against him by the LLC by (1) taking an assignment of a third-party’s claim against the LLC; (2) getting and then registering a default judgment against the LLC; (3) seizing the LLC’s lone asset: its lawsuit against the plaintiff; and (4) buying the lawsuit for $10K.  This four-step progression allowed the plaintiff to extinguish the LLC’s claim against him.

Plaintiff was co-owner of the defendant LLC.  After a third-party sued the LLC in Minnesota Federal court (the “Minnesota Federal Case”), Plaintiff paid the third-party $150,000 for an assignment of that case.  Plaintiff then obtained a $240K default judgment against the LLC.

Meanwhile, the LLC, through its other owner, sued the plaintiff in Wisconsin State Court (the “Wisconsin State Case”) for breach of fiduciary duty in connection with plaintiff’s alleged plundering of the LLC.  While the Wisconsin State Case was pending, Plaintiff registered the Minnesota judgment against the LLC in Wisconsin Federal court.

Plaintiff, now a judgment creditor of the LLC, filed suit in Wisconsin Federal Court (the “Wisconsin Federal Case”) to execute on the $240K judgment against the LLC.  The Wisconsin District Court allowed the plaintiff to seize the LLC’s lone asset – the Wisconsin State Case (the LLC’s breach of fiduciary duty claim against plaintiff) – for $10,000.  This immunized the plaintiff from liability in the Wisconsin State Case as there was no longer a claim for the LLC to pursue against the plaintiff.  The LLC appealed.

The Seventh Circuit voided the sale of the Wisconsin State Case finding the sale price disproportionately low.

Under Wisconsin law, a chose in action is normally considered intangible property that can be assigned and seized to satisfy a judgment.  However, the amount paid for a chose in action must not be so low as to shock the conscience of the court.

In this case, the court branded the plaintiff a “troll of sorts”: it noted the plaintiff buying the LLC’s claim (the Wisconsin State Case) at a steep discount: the defendant paid $150,000 for an assignment of a third-party claim against the LLC and then paid only $10,000 for the LLC’s breach of fiduciary duty claim against plaintiff.

The court found that under Wisconsin law, the $10,000 the plaintiff paid for the LLC’s claim against him was conscience-shockingly low compared to the dollar value of the LLC’s claim.  The plaintiff did not purchase the LLC’s lawsuit in good faith.  The Seventh Circuit reversed the District Court’s validation of plaintiff’s $10K purchase so the LLC could pursue its breach of fiduciary duty claim against the plaintiff in the Wisconsin State Case.

Take-aways:

This seems like the right result.  The court guarded against a litigant essentially buying his way out of a lawsuit (at least it had the appearance of this) by paying a mere fraction of what the suit was possibly worth.  

The case serves as an example of a court looking beneath the surface of a what looks like a routine judgment enforcement tool (seizing assets of a judgment debtor) and adjusting the equities between the parties.  By voiding the sale, the LLC will now have an opportunity to pursue its breach of fiduciary duty claim against the plaintiff in state court. 

An Enigma Wrapped Inside A Conundrum: Suing the LLC in Federal Court – How Hard Can it Be?

maze

A limited liability company (LLC) is generally lauded as a flexible business entity that provides the limited liability of a corporation with the tax attributes of a partnership (flow-through, not double, taxation).

Flexibility is another oft-cited hallmark of the LLC form as its members can be one or more individuals, corporations, partnerships or even other LLCs. It’s common to see LLCs that have several other LLC members that are in turn comprised of (still more) LLC members.  With multiple layers of LLC members, tricky jurisdictional issues routinely abound.

When Federal subject matter jurisdiction is at stake, the question of whether a plaintiff can sue an LLC in Federal court quickly morphs from an academic, “fun” one, to an important strategic one.

Here are some useful bullet-points:

– A Federal district court has original subject matter jurisdiction over matters involving citizens of different states and the amount in controversy exceeds $75,000. 28 U.S.C. s. 1332(a)(1).

– There must be “complete diversity” between the parties: each plaintiff must be a citizen of a different state than each defendant.  The easily parroted rule becomes hard to apply the more parties are involved in a given lawsuit; especially where business entities are implicated in a case.

– A corporation is considered a citizen of the state where it has its principal place of business and where it is incorporated.  So, if Corporation X was incorporated in Texas but has its main office in Ohio, Corporation X would be considered a citizen of both Ohio and Texas.  28 U.S.C. s. 1332(c)(1).

– An LLC is considered a citizen of the state of its members;

– An LLC can have as members, partnerships, corporations and other entities;

– When an LLC has multiple members that have varied citizenships, a court must examine each member’s state of citizenship, as well as each member’s members’ citizenship, when determining whether it has jurisdiction over an LLC defendant.

A Case Illustration

Cumulus Radio Corp. v. Olson, 2015 WL 1110592, a case I’ve twice featured for its discussion of Federal TRO guidelines, illustrates the serpentine analytical framework involved with an LLC that’s made up of one or more LLC members.

There, the plaintiff broadcasting company was a Nevada corporation with its principal place of business in Georgia.  The defendant LLC was a Delaware-registered LLC based in Oregon.  The defendant LLC had but one member that happened to be another LLC.  That LLC (the sole member of the defendant LLC) had a single member – an individual who lived in Georgia.

Because the Delaware LLC’s sole member’s sole member was a Georgia resident, there was incomplete diversity between the plaintiff and defendant.  Normally, this would give the defendant a basis to move to dismiss the complaint for lack of subject matter jurisdiction.  The plaintiff would then have to sue the LLC defendant in state court in Delaware (where it was formed) Oregon (where it is based) or Georgia (where its member’s member lived).

While the court ultimately found that the Georgia resident wasn’t truly a member based on the LLC’s Operating Agreement, Cumulus provides a good illustration of the multi-layered jurisdictional analysis required with an LLC defendant that has several individual or business entity constituents.

Sources:

Hicklin Engineering LC v. Bartell, 439 F.3d 346 (7th Cir. 2006);

– 28 U.S.C. s. 1332(a), (c).

http://www.insidecounsel.com/2013/09/12/litigation-carefully-examine-the-layers-of-llc-cit (this is a good article from 2013 that lays out the applicable rules)

Seventh Circuit Upholds Slashing Of Over $300K In Attorneys’ Fees Based On $2,000 Jury Verdict

scissorsAn easy to parrot, hard to apply attorney fee maxim involves the “prevailing party” standard.  To get attorneys fees awarded under a statutory or contractual fee-shifting provision, you must “prevail” or win the case.  So what happens when your win is a proverbial Pyrrhic one?  That is, you win the lawsuit but get only a fraction of the money you sought? Or, you’re victorious on only one of multiple claims; losing the other claims.  What then?

Montanez v. City of Chicago (http://caselaw.findlaw.com/us-7th-circuit/1670216.html) examines these issues and more in a decision that illustrates the broad discretion a district court has in both fashioning and reducing claimed attorneys fees based on the level of the fee seeker’s litigation success.

The plaintiff filed a civil rights suit against two police officers and a municipality alleging excessive force.  The plaintiff also pled various state law claims.  The state law claims were dismissed as untimely and the plaintiff went to trial on his civil rights (Section 1983) claims.  A jury awarded the plaintiff $2,000 against one of the officers: $1,000 in compensatory damages; $1,000 in punitives.  The jury ruled against the plaintiff on his claims against the other police officer.  The plaintiff sought fees and litigation costs of over $400,000.  The defendants of course argued for a severe fee slashing in light of the paltry jury award.  The District Court (mostly) obliged by lopping off over $300,000 of the plaintiff’s fees and costs.  Plaintiff appealed.

Held: Affirmed

Reasons:

Seven lawyers billed nearly 1100 aggregate hours for the plaintiff in litigating his excessive force claims.  The final tab exceeded over $400,000 in fees and almost $7,000 in costs.  The District Court shortened the fee amount to just over $108,000 and awarded costs of over $3,000.  So the plaintiff still got more than 50 times the jury award.

Affirming the trial court’s fees and costs reduction, the Seventh Circuit noted that in cases “lacking private incentives to limit the scope of litigation” (like fee-shifting Federal suits), a trial judge should exert his authority under Federal Rules 16 and 26 to guard against overlawyering, excessive discovery and wasteful pretrial activities.  The Court then stated the specific attorneys’ fees rules that guide the court’s analysis:

a prevailing party in a Section 1983 suit can recover “a reasonable attorney’s fee” that is generally computed by the “lodestar” method: number of hours multiplied by hourly rate;

– where the hours a plaintiff spent on successful claims can be segregated from time spent on unsuccessful claims, the time spent on the latter claims can be subtracted from the fee award;

– an attorneys’ reasonable hourly rate is based on the local market rate – the best evidence of which is the rate charged by that attorney for similar work;

– if the court can’t determine a reasonable hourly rate based on the petitioning attorney’s rates, the court looks to the rates charged by similarly experienced attorneys in the community and evidence of rates set for attorneys in similar cases;

– hourly attorney rates are particularly difficult in cases where the attorney typically uses contingent fee agreements;

– conclusory affidavits from other attorneys who opine that another attorney’s rates are reasonable have little probative value;

– the court’s goal in shifting fees (to the losing party) is not “auditing perfection”: instead, it’s to attain “rough justice”;

– in the area of legal research, the trial court has broad discretion in determining what research likely contributed to the successful result at trial and whether certain research was “esoteric”, redundant or had nothing to do with plaintiff’s winning claims;

– the district court can strike vague billing entries and where a fee request dwarfs actual damages won at trial, this raises a “red flag” (as to the validity of the requested fees);

28 U.S.C. § 1920 allows a prevailing party to recover “costs” including (i) costs for transcripts necessarily obtained for use in the case; (ii) printing costs and (iii) copying costs for materials necessarily obtained for use in a case.

Montanez, pp. 7-13, 17.

With these guideposts informing its analysis, the Seventh Circuit upheld the District Court’s cuts to the plaintiff’s fees and costs request.  Stating there is no precise mathematical formula for adjusting fee requests, the Court noted that a fee reduction is proper where fees dwarf the trial damage award and the plaintiff achieves “limited success.”

Here, the plaintiff’s success was limited as he won only $2,000 at trial and lost on 4 of his 6 claims.  The Seventh Circuit affirmed the District Court’s 50% cut in the plaintiff’s total lodestar fees based on the comparatively low money judgment amount and on plaintiff losing the majority of his claims.  The other fees and costs reductions approved by the Seventh Circuit included those based on (1) fees generated for witnesses that were never called; (2) for deposition transcripts that were never used, (3) transcription rates that exceeded the allowable amount under Local Rule 54 and (4) legal research into areas that had no bearing on plaintiff’s successful claims.  The Seventh Circuit found these subtractions proper and within the District’s Court’s fee award discretion.

Summary: The case presents a fairly exhaustive summary of a Federal court’s fee award calculus and shows the broad discretion a district court has in lopping off what it views as extraneous fees and costs.  It’s clear that while there is no precise arithmetical rule that governs in all fee cases, a court will look at the claimed fees in relation to the actual money judgment won at trial and will also consider how many claims a litigant won and lost in the same case when determining the fee award.