The Montana Supreme Court recently interpreted for the first time the grounds for judicial dissolution of an LLC under Montana’s Limited Liability Company Act. Gordon v. Kuzara, No. DA 12-0116, 2012 WL 4086512 (Mont. Sept. 18, 2012). The Supreme Court upheld the trial court’s dissolution order.

Background.  James and Christina Gordon entered into Half Breed Land and Livestock LLC with several members of the Kuzara family in 2006. The purpose of the LLC was to raise and sell cattle, and the members contributed cash and cattle to the company and commenced operations. By 2008 the Gordons became aware of various irregularities, held a meeting of the members, audited the LLC’s records, and eventually filed suit seeking a judicial order dissolving the LLC.

Round 1.  The court’s recent decision was not the first time this dispute has been in front of the Montana Supreme Court. After the Gordons filed their suit seeking dissolution, Joseph Kim Kuzara, one of the defendants, filed a motion to compel arbitration based on an arbitration clause in the LLC’s Operating Agreement. That motion, if successful, would have resulted in the case being decided by an arbitrator instead of by the trial court. The trial court denied the motion, and on the appeal the Supreme Court ruled in December, 2010 that the arbitration clause in the Operating Agreement did not apply to a member’s request for judicial dissolution. I commented on that decision, here.

Round 2.  The Gordons based their petition for dissolution on Mont. Code Ann. § 35-8-902(1), which provides several alternative grounds for judicial dissolution:

  1. the economic purpose of the company is likely to be unreasonably frustrated;
  2. another member has engaged in conduct relating to the company’s business that makes it not reasonably practicable to carry on the company’s business with that member remaining as a member;
  3. it is not otherwise reasonably practicable to carry on the company’s business in conformity with the articles of organization and the operating agreement;
  4. the company failed to purchase the petitioner’s distributional interest as required by 35-8-805; or
  5. the members or managers in control of the company have acted, are acting, or will act in a manner that is illegal, oppressive, fraudulent, or unfairly prejudicial to the petitioner.

It was undisputed by Kuzara that on multiple occasions the proceeds of calf sales by the LLC had been deposited into the LLC’s account and then immediately remitted to Kuzara’s family corporation, and that on one occasion a withdrawal of $2,000 from the LLC’s account, which was remitted to Kuzara’s family corporation, caused an overdraft of the LLC’s bank account. Kuzara was also charging the LLC for his time at $20 an hour, despite the fact that § 35-8-504(4) of the Montana LLC Act provides that an LLC member is not entitled to remuneration for services performed for the LLC, except when winding up the business. Gordon, 2012 WL 4086512, at *4.

The court affirmed the trial court’s summary judgment ruling and the dissolution order, holding that the defendants’ undisputed actions were adequate to support the trial court’s ruling under either clause (a), clause (b), or clause (e) of § 35-8-902(1). Id. The court noted that the listed grounds for dissolution are stated in the disjunctive, and “a finding that any one of the grounds for dissolution has been met is sufficient to uphold a judicial order of dissolution.” Id. at *4. The court did not describe how each of the listed grounds applied to the specific facts, but apparently saw an ongoing pattern of bad behavior that could fit under any of the three specified grounds. “The reasonable conclusion was that R Three, as a member of the LLC, was being disproportionately enriched and was girding itself to make future claims against the LLC through the acts and omissions of Kim Kuzara.” Id. at *4.

While the Gordons’ dissolution action was pending, Kuzara moved to amend the defendants’ answer in order to add counterclaims against the Gordons for breach of the duty of loyalty and for negligent interference with a business relationship. The trial court refused to allow the amendment and the Supreme Court affirmed. The court pointed out that the arbitration clause in the Operating Agreement, which it had determined in Round 1 was not applicable to a dissolution petition, would apply to the tort counterclaims. To add the counterclaims would have been legally insufficient and futile, said the court, because the parties’ Operating Agreement required those claims to be arbitrated. The trial court’s refusal to allow the amendment to Kuzara’s answer was therefore affirmed. Id. at *5.

Comment.  The court in Gordon found that the facts showed a pattern of misappropriation of funds and unauthorized charges to the LLC which implicated several of the statutory grounds for judicial dissolution. That appears to be a fair reading of the statute, and it points out that there is some redundancy in the alternative grounds in Montana’s statute.

Some states take a more narrow approach to judicial dissolution. Delaware, for example, only allows one ground for judicial dissolution: “whenever it is not reasonably practicable to carry on the business in conformity with a limited liability company agreement.” Del. Code Ann. tit. 6, § 18-802. This is similar to the approach taken for limited partnerships in the Revised Uniform Limited Partnership Act, § 802. Washington also follows the RULPA approach, but adds “or … other circumstances render dissolution equitable.” RCW 25.15.275.

The grounds for judicial dissolution listed in state LLC statutes vary widely. Given the courts’ willingness to assert their equitable powers broadly, however, I think the outcomes from the cases are more consistent than the statutes would lead one to think. For an example, see my discussion of Mizrahi v. Cohen, No. 3865/10, 2012 WL 104775 (N.Y. Sup. Ct. Jan. 12, 2012), here.