Mickman v. American International Processing, L.L.C., et al, (Del. Ch., C. A. No. 3869-VCP, April 1, 2009), read opinion here.
Kevin Brady, a highly respected Delaware litigator, provides us with the benefit of his analysis of this case.
In this Chancery Court decision, Vice Chancellor Parsons addressed the issue of what evidence the Court might would consider in determining who had standing under 6 Del. C. § 18-305 to inspect the books and records of a Delaware limited liability company.
No Evidence of Membership in Operating Agreement
Defendant LFF, L.L.C. (“LFF”) moved for summary judgment on the basis that plaintiff was not entitled to inspect the books and records of LFF because she was not a member or manager of LFF. Defendant LFF argued that there was no record evidence in the company’s documents to show that plaintiff had any interest in LFF. Plaintiff responded by referring to documents signed by Richard Mickman (plaintiff’s ex-husband) and Howard Gleit, the only two members of LFF listed in the LLC operating agreement initially. In particular, plaintiff identified a 2001 tax return for LFF, which in the Schedule K-1 for each member, listed the members as Howard Gleit and [plaintiff and her ex-husband]. In addition, before they were divorced, plaintiff’s ex-husband “signed under penalty of perjury an Offer in Compromise to the IRS on or about February 9, 2002, in which he stated that his ‘only assets are his house . . . and stock in a number of closely held companies owned jointly by Taxpayer and his wife.’ ”
Should LLCs Get the Same Treatment as Corporations?
Under 6 Del. C. § 18-305, “[e]ach member of a limited liability company has the
right . . . to obtain from the limited liability company from time to time upon reasonable
demand for any purpose reasonably related to the member’s interest as a member of the
[LLC] . . . [various records of the LLC].” LFF argued that it had a formal operating agreement and that neither that agreement nor any amendments to it listed plaintiff as a member of LFF. LFF also argued that the Court should treat an LLC like a corporation in connection with a demand for inspection of books and records. For a corporation, only stockholders listed in the stock ledger are recognized as holders of record of stock for purposes of a request for books and records under Section 220 of the Delaware General Corporation Law. LFF argued that the Court should extend that reasoning to LLCs such that “only members listed in an LLC’s operating agreement, where a written agreement exists, should be recognized as members with a right to inspect books and records under Section 18-305.”
To support its argument, LFF cited Shaw v. Agri-Mark, Inc., 663 A.2d 464 (Del. 1995), where the Delaware Supreme held that “a party who supplied equity to a stock corporation, but who was not a stockholder of record, had no right to inspect the corporation’s books and records under Delaware common law or under Section 220.”
Vice Chancellor Parsons concluded, however, that there was nothing in that case to suggest, “by analogy or otherwise, that the inspection rights of members of an LLC under Section 18-305 should be limited strictly to persons named as members in the operating agreement.” (citing the decision in Shaw where Court limited the holding to stock corporations.)
Evidence Outside the Operating Agreement Considered?
Vice Chancellor Parsons stated that “LLCs generally are created on a less
formal basis than corporations and are basically creatures of contract.” Based on the
flexible and less formal nature of LLCs, the Court noted that “it is reasonable to consider evidence beyond the four corners of the operating agreement, where, as here, the plaintiff has presented admissible evidence that, notwithstanding the language of the operating agreement, that suggests the parties to the agreement intended to make, and believed they had made, the plaintiff a member of the LLC.”
Summary Judgment Denied
While there was no dispute that the LFF operating agreement did not list plaintiff as a member, there was evidence that the representations about plaintiff’s membership were mistakes. As a result, the Court denied LFF’s motion for summary judgment.