Dumbar Group, LLC v. Tignor

Brief Fact Summary.

Dunbar Group, LLC (Plaintiff) was a co-equal member and manager with Tignor (Defendant) in XpertCTI, LLC (Xpert) and contended that Xpert should not be dissolved following the expulsion of Tignor (Defendant) because evidence was lacking to show that it would not be reasonably practical to continue Xpert’s business ever after Tignor’s (Defendant) expulsion.

Synopsis of Rule of Law.

An LLC will not be judicially dissolved where it has not been demonstrated that it will not be reasonably practical to continue the LLC’s business.

Facts.

Dunbar Group, LLC (Plaintiff) and Tignor (Defendant) were co-equal members and managers) in XpertCTI, LLC (Xpert).  Dunbar was controlled by its sole owner, Robertson (Plaintiff), and Defendant was a 50 percent owner of X-tel, Inc.  Dunbar’s (Plaintiff) role in Xpert was to provide software, and Tignor’s (Defendant) role was to provide access to business contacts.  Xpert’s operating agreement provided a procedure for a member to assert a breach of the agreement by another member, where, if the breach was not timely cured by the defaulting member, the complaining member had the “right to petition a court of competent jurisdiction for dissolution of the Company.â€Â  The agreement also stated that the “dissolution of a member or occurrence of any other event that terminates the continued membership of a member in the Company shall not cause the dissolution of the Company.â€Â  The agreement also stated that the “dissolution of a member or occurrence of any other event that terminates the continued membership of a member in the Company shall not cause the dissolution of the Companyâ€Â  Xpert had a 36-month contract with one of its main clients, Samsung, which renewed annually unless terminated by either party.  Eventually, disagreements came up between Robertson (Plaintiff) and T=Defendant about the management and distribution of company assets.  Dunbar, Robertson (Plaintiff) and Xpert (collectively “Dunbarâ€) (Plaintiff) filed suit seeking Defendant’s expulsion, claiming numerous allegations of Defendant’s misconduct, including Defendant’s commingling of Xpert’s funds with those of X-tel.  Defendant, in turn, sought judicial dissolution of Xpert, claiming that it was not reasonably practical to continue Xpert’s business in conformity with its articles and operating agreement because the company was deadlocked in its ability to conduct its business affairs.  The actions were consolidated, and the trial court found that Defendant had indeed commingled Xpert’s funds with X-tel’s; had authorized a change in the status of Xpert’s checking account without informing Robertson (Plaintiff); restricted Robertson’s (Plaintiff) access to equipment that impacted Xpert’s ability to fulfill orders in a timely manner and impacted the quality of the company’s products; terminated Robertson’s access to his Xpert email account; and had committed other misconduct that was contrary to Xpert’s best interest and negatively affected its ability to continue business.  The trial court determined that Defendant’s conduct called for immediate expulsion under the state’s LLC statute, and ordered Defendant’s expulsion.  Additionally, however, the court ordered that Xpert be dissolved after its contract with Samsung ended.  In doing so, the trial court did not consider the evidence in light of the factor that Defendant was being expelled.  Dunbar Plaintiff appealed the portion of the court’s order dissolving Xpert.  The state’s highest court granted review.

Issue.

Will an LLC be judicially dissolved where it has not been demonstrated that it will not be reasonably practical to continue the LLC’s business?

Held.

(Keenan, J.)  No.  An LLC will not be judicially dissolved where it has not been demonstrated that it will not be reasonably practical to continue the LLC’s business.  According to the state’s LLC statute, judicial dissolution may be decreed only “if it is not reasonably practicable to carry on the business in conformity with the articles of organization and any operating agreement.â€Â  This statutory language is clear, so its plain meaning will be applied.  In this case, the trial court did not evaluate the evidence in light of the fact that Defendant would be expelled as a member and manager.  As Defendant’s conduct had created a number of problems in Xpert’s management, his being relegated to a more passive role of mere investor could improve those problems, and there was no showing that it would not be reasonably practicable for Xpert to carry on its business pursuant to its operating authority.  Also, even the trial court’s order shows that the trial court believed Xpert could continue to operate for an extended period of time, since dissolution was to follow the termination of the Samsung contract—which seemingly could have gone on for years.  There was, therefore, insufficient evidence to support such a judicial dissolution.  Affirmed as to Tignor’s (Defendant) expulsion.  Reversed as to dissolution of Xpert. 

Concurrence.

(Thomas, J.) In this case, the application of the misappropriation theory, as approved by the majority of the Court, is in an inconsistent application of § 10(b).  In addition, the imposition of liability, regardless of whether a fiduciary duty exists, fails to agree with the purpose of § 14(e) in the prevention of fraudulent acts connected with the sale of securities.

Discussion.

There is a strict statutory standard for dissolution of an LLC, reflecting Legislature’s deference to contractual agreements between parties.  While a board or management deadlock that prevents an LLC from operating or from furthering its stated business will usually be held to mean that it is not reasonable practicable for the company to continue its business, in this case, the court implies that the expulsion of Tignor (Defendant) from management will prevent any such deadlock in the future.